The Bank of England, the UK’s central bank, has warned that climate change could widen the UK’s insurance protection gap, leaving more households exposed to the financial costs of flooding as extreme weather events become more damaging.
In a speech delivered by James Talbot, the Bank’s Executive Director for International, at a sustainable finance conference hosted by Banco de México on 21 October, the central bank highlighted the growing challenges of keeping insurance affordable and available, alongside the wider implications of climate-related disruption for inflation and financial stability.
The Bank’s modelling suggests that the proportion of UK mortgage borrowers without insurance could rise from around 5% currently to between 7% and 10% by 2050, potentially reaching 16% following a severe flood event. A widening protection gap could leave more households and businesses responsible for covering damage themselves, while increasing the potential financial exposure of mortgage lenders and other institutions.
Talbot said insurance was an important part of the response but could not address the problem alone. “Insurance cannot close protection gaps on its own. But better data, investment in adaptation and more resilient infrastructure can help sustain affordable cover,” he said.
The speech also highlighted how extreme weather can affect the wider economy, disrupting production and supply chains and contributing to price pressures. Global losses from weather-related events exceeded $200bn in 2025, according to figures cited in the speech, illustrating the growing economic significance of physical climate risks.
For the Bank of England, these disruptions matter because they can affect inflation and the outlook for monetary policy. The UK is particularly exposed to international supply-chain disruption, importing around 40% of its food. Weather-related damage overseas can therefore feed through into domestic prices.
“When extreme weather events affect production, output and inflation, that matters for our primary goal of maintaining price stability,” Talbot said.
The effects of severe weather can already be seen in Europe. Low water levels on Germany’s River Rhine have disrupted the transport of goods, with research cited in the speech estimating that 30 days of low water can reduce German industrial production by around 1%. Flooding in Spain’s Valencia region in October 2024 also caused substantial economic damage and weighed on economic activity.
Talbot stressed that monetary policy cannot prevent the initial physical damage caused by such events. “Monetary policy cannot repair infrastructure, restore a harvest, or offset the initial physical damage,” he said. Instead, central banks must assess how disruption affects prices and whether the resulting inflationary pressure is likely to persist.
Repeated shocks can make that assessment more difficult. As Talbot explained, “a sequence of individually temporary shocks which arrive before the effects of previous disturbances have dissipated can look and feel like more persistent inflationary pressure.”
The Bank’s message was that stronger resilience could help limit both the economic damage caused by extreme weather and the pressure on insurance markets. Investment in adaptation and infrastructure, alongside better data on climate risks, could help reduce losses and support the availability of affordable cover.
“The more resilient an economy is, the easier it is to absorb physical shocks. As resilience erodes, the same shock can become progressively harder to look through,” Talbot said.
The speech placed insurance protection gaps within a wider discussion of financial and economic stability, highlighting how climate-related risks can affect households, businesses, lenders and policymakers. For the UK, reducing exposure to flooding and improving resilience could be increasingly important in limiting the financial consequences of extreme weather.
