Good morning from New Economy Brief.
The climate crisis is getting harder to ignore. Though the UK will be far from the worst-affected country, last year’s hottest summer on record, and this year’s warmer and wetter winter, are stark reminders that life is becoming increasingly unstable everywhere.
This week’s New Economy Brief explores how damage to homes from extreme weather is turning climate change into a lived reality, and linking these everyday experiences to systemic risks to the financial and economic system.
Extreme weather is putting homes at risk.
According to UK government estimates, over 6 million homes are at risk of flooding, and hotter, drier summers are leading to increased damage from subsidence. These impacts are set to increase. Insurer Aviva projects that UK properties at risk of flooding will reach 8 million by 2050, whilst those facing subsidence risk could rise from 5 to 6.45 million.
All this is adding to costs for insurers, whose weather-related damage payouts for 2025 are expected to be more than double the 2017-21 average.
More damages mean rising premiums, and even withdrawal of cover.
This leads to rising insurance prices, and in some cases, withdrawal of coverage altogether.
The Bank of England has estimated that by 2050 2 million UK homes could be uninsurable due to flood risk, and premium prices are already rising, with home insurance costing around 30% more on average in 2025 than in 2022.
Though rising labour and materials costs have contributed to higher premiums, the rising frequency of extreme weather is also a key factor, and there have been reports that whole towns may be abandoned due to regular severe flooding.
Who bears the costs?
Insurers are profit-making entities – they withdraw coverage or raise premiums to protect their own bottom lines, which means the impacts of extreme weather ultimately fall on individuals and the state. Low-income homeowners are hit hardest, according to researchers at Bayes Business School, as rising climate costs add to the higher prices they are already charged – an issue that’s dubbed the ‘poverty premium’.
In several countries, state-backed reinsurance schemes help to shield consumers in high-risk areas. The UK’s Flood Re lowers prices by reinsuring the flooding component of private contracts. Home insurers pay for this through a regular levy. They can then offload risk onto Flood Re, which covers any claims they face for flood damage.
However, Flood Re’s future is uncertain, with the scheme due to be wound down by 2039. This is by design – it was intended to be a temporary measure, lowering prices in the short term while supporting the transition to a ‘free market’ for insurance. The theory was that premiums would fall once insurers, households and developers have more information on weather risks, enabling them to invest in defenses or leave riskier areas.
But as political economist Brett Christophers has argued, there is a tension between affordability and the market mechanism. Rising premiums are the market forces intended to discourage owning and building in high-risk areas, but they also hit low-income households the hardest. In any case, such a transition has failed to take place. A decade since its inception, Flood Re has warned that the affordability problem is getting worse, and the proportion of new homes built in high risk areas continues to climb.
Ultimately, even if insurance is available, it can’t prevent the human devastation caused by severe weather. And when there’s lasting damage, individuals and governments are the ones left holding the can, as seen just last month when a south Wales council bought out the residents of a row of 16 homes deemed undefendable from further flooding.
What are the impacts for the wider economy?
Insurance acts as a ‘shock absorber’ for the wider economy. Declining protection leaves individuals and businesses more vulnerable when shocks hit, and the effects can cascade throughout the financial system and wider economy. It also constrains investment in resilience, creating a ‘doom loop’ of rising insurance costs leading to spending cuts, which increase vulnerability still further and feeds into even higher premiums.
For years, experts have been raising the alarm that the threat to housing markets from climate change could spark a financial crisis. A key trigger would be uninsurability leading to rapid declines in house values, which would reverberate throughout the financial system because of how much debt is ultimately secured on people’s homes.
Perhaps unsurprisingly, insurers have warned us vocally about these risks. The industry has ranked climate change as the biggest threat it faces for five years running. A board member at major insurer Allianz even made waves last year by warning that the climate crisis is ‘on track to destroy capitalism’.
What can be done about it?
Prevention is the best cure. Most obviously, all this underscores the need for rapid action to halt global heating and nature loss. But with the impacts already with us, investment in adaptation is critical. This includes flood defenses, water systems and housing retrofits, as well as restoring the natural environments that provide some of the best forms of defence.
Planning regulation. Though the Government has put planning deregulation at the heart of its housing strategy, the increasing harm climate change is doing provides another example of why rolling back regulation is unlikely to solve the UK’s housing woes. Just this week, both insurers and campaigners warned of the risks of government plans to loosen existing restrictions on building in flood-prone areas. Louis Ramirez, director of the campaign group Flooded People UK, said that weakening the rules would mean that if flooding happens, home owners “will struggle to secure insurance, plunging them into an unending financial and emotional nightmare.”
Insurers of last resort. Schemes like Flood Re can make insurance cheaper and more available. But they do this by letting the private insurance industry offload risk onto to the government. The danger is that they end up privatising rewards and socialising losses - they can even expose those in flood-prone areas to profiteering, according to the US-based Climate and Community Institute (CCI).
CCI argues the best solution to private insurers' inherent conflict between profits and protection is for the state to provide insurance directly. The US already has a public provider – the National Flood Insurance Programme – giving it a strong foundation to build upon.
Ultimately, there’s no silver bullet. But it’s clear that market-based approaches aren’t giving us enough resilience in an increasingly volatile world – in fact, they seem to be making things worse. The deep interlinkages between seemingly disparate areas like planning, housing, climate adaptation and the financial system call for a coordinated approach that only governments can deliver.
The cost of living is getting higher. Modelling from the Joseph Rowntree Foundation finds that average annual household disposable incomes are expected to rise by just £40 from 2024 to 2029. What’s more, living standards have already reached their peak for the period - average incomes will now fall £580 by 2029. And that’s even before accounting for the potential economic harm of the conflict in the Gulf.
Why addressing the crisis means public provision. A new briefing from Common Wealth argues that to bring down the rising cost of essentials, we need to tackle the ‘privatisation premium’ – the higher cost we pay for housing, water, transport and energy because of privatisation. They argue that a public corporation should be tasked with re-nationalising key assets, building alternatives to the market, and eventually moving towards the public provision of essentials.
How to win back the left. A week after Labour’s loss in Gorton and Denton, polling from Persuasion UK for 38 Degrees finds that Labour is losing more of its 2024 voters to left-wing parties than to the right. They argue that a focus on ‘cost of living populism’ could form a winnable coalition.
A macroeconomic framework for a resilient economy. The New Economics Foundation’s Jaya Sood argues in a new blog that the UK economy is particularly exposed to the economic instability and soaring oil and gas prices as a result of the war on the Middle East. The Bank of England is now widely expected to respond by keeping interest rates higher for longer, but Sood argues this will only constrain necessary investment in resilience, and that current turmoil is yet more evidence of the need to reform our macroeconomic framework.
Banks are failing to support the real economy. Positive Money’s new briefing digs into where UK banks lent to in 2025, finding that credit overwhelmingly paid for buying existing assets, with less than 7% of net new lending going to productive sectors. They argue the Chancellor should ‘take a leaf out of Alistair Darling’s book’ and better regulate the City.
