UK home insurers paid out a record £585 million for weather-related damage in 2024, according to the Association of British Insurers (ABI). This figure shows why climate risk has moved from a forecasting concern to a present pressure on underwriting, capital, and reserves.
For the UK insurance industry, the question isn’t whether the climate is reshaping the book but how to measure, price, and manage this exposure. Read on for a working definition of climate risk, the main categories, and how the London Market is responding.
Climate risk is the risk an insurer faces from the physical, transition, and litigation effects of a changing climate and the global response to it. It reaches across underwriting, investments, operations, and reputation. The International Association of Insurance Supervisors (IAIS) used this definition in its Insurance Core Principles in December 2024.
The Task Force on Climate-related Financial Disclosures (TCFD) developed the modern framework, and the IAIS has since codified it for supervisors in more than 200 jurisdictions. Climate-related financial risks now rank alongside credit, market, and operational risks in the prudential rulebook.
The Institute and Faculty of Actuaries (IFoA) uses the concept of double materiality to capture two directions of exposure:
Both directions matter for UK firms. Prudential Regulation Authority (PRA) supervision focuses on the outside-in financial impact, while disclosure rules and stakeholder pressure are pushing inside-out exposure into board-level risk discussions.
Insurers are the main financial intermediary for climate risks. They price floods, windstorms, wildfires, and heat events for households, businesses, and public bodies. They also hold long-duration assets exposed to transition shocks.
The European Insurance and Occupational Pensions Authority (EIOPA) estimates that only around a quarter of natural catastrophe losses in Europe are currently insured. This protection gap is the face of climate risk for the UK industry. Rising claims on one side, widening uninsured loss on the other.
The TCFD framework groups climate risk into three categories:
Physical risk is the direct damage caused by a changing climate. It splits into two forms:
Both forms translate into property damage, business interruption, supply chain disruption, and shifts in mortality and morbidity.
UK exposure is rising fast. Flood frequency in mid-latitude regions has increased 2.5 times in the past decade, and at least one in six people in the UK already live with flood risk. Insurers facing flood exposure over multi-decade horizons is now a major underwriting and pricing question.
Transition risk is the financial impact of moving to a lower-carbon economy. It comes from four pressure points:
Unlike physical risk, transition risk can move in the near term and arrive in volatile steps. A single policy announcement or court ruling can reprice exposures across an entire portfolio. Insurers with long-duration corporate bond holdings and equities in carbon-intensive sectors carry the largest balance-sheet exposure.
Liability and litigation risk is the legal exposure created by climate change. The IAIS defines it as cases brought before judicial bodies on the science of climate change or on mitigation and adaptation. It runs in two directions for insurers:
The FCA’s anti-greenwashing rule now requires sustainability claims in financial products to be clear, fair, and not misleading. Breaches can lead to prudential and reputational consequences.
The direct damage caused by a changing climate, split between acute events such as floods and storms and chronic shifts like sea level rise and water scarcity
The financial impact of moving to a lower-carbon economy, driven by policy change, technology shifts, market repricing, and changes in consumer demand
The legal exposure created by climate change, running through D&O, E&O, and general liability claims, and direct greenwashing exposure for insurers themselves
Climate risk supervision shifted into a new phase on 3 December 2025, when the PRA published Supervisory Statement SS5/25. It replaces SS3/19, the 2019 supervisory statement that first set climate risk expectations for banks and insurers. The new rule takes effect on 3 June 2026.
SS5/25 is more specific than its predecessor, particularly on governance. It requires firms to:
Firms must also prove how scenario results influence strategy, balance sheet planning, underwriting, and capital allocation.
Industry readiness, however, is uneven. A February 2026 survey of insurers’ SS5/25 progress found that 57 percent of respondents were still reviewing the rules and only 20 percent had completed board-level preparation.
The Bank of England’s (BoE) 2020 Climate Financial Risk Forum launch webinar lays out the regulatory thinking that has shaped SS5/25.
SS5/25 doesn’t stand alone. Four other rules apply:
For firms operating in the EU, EIOPA has recalibrated natural catastrophe standard formula parameters. Flood Re, the public-private scheme for residential flood insurance, meanwhile, remains in place until its scheduled close in 2039.
Climate risk practice covers two tasks: measuring exposure and managing it. Both are formal requirements under SS5/25 and the IAIS Insurance Core Principles.
Scenario analysis is the primary tool for assessing and measuring climate risk. Most firms use Network for Greening the Financial System (NGFS) scenarios, which model orderly, disorderly, and failed transition pathways. Stress testing applies these scenarios to the balance sheet and underwriting book, with BoE’s 2021 Climate Biennial Exploratory Scenario as the benchmark.
Carbon footprint metrics measure portfolio exposure. The GHG Protocol splits emissions into:
Two summary metrics are widely used:
Firms report scenario results through the Own Risk and Solvency Assessment (ORSA).
Climate risk isn’t a standalone category. The IFoA notes that it manifests through credit, market, underwriting, operational, and reputational risk, and management must reach across all of them. Risk appetite statements need updating to reflect climate exposures.
The skills picture is also shifting. Climate risk frameworks are reshaping the underwriting relationship, with insurers building climate-conditioned catastrophe models and tying scenario analysis to global temperature pathways. Climate risk analyst is now a recognised role, and the IFoA has built dedicated training to support carbon literacy.
This Finextra interview walks through where current scenario models understate risk.
To see which practitioners are shaping climate risk practice across the market, check out our special report on the top insurance professionals and brokers globally.
The London Market is the world’s largest commercial and specialist insurance market, with about 7.6 percent of global share. Every one of the top 20 global insurance and reinsurance firms has a presence in London. London firms write business in more than 200 countries. This scale makes the market a laboratory for climate risk innovation.
The main issue is the protection gap. Global natural catastrophe losses hit US$380 billion in 2023, of which only US$118 billion was insured. Flood Re remains in place until its scheduled close in 2039, but the £5.2 billion government flood defence program is 40 percent behind schedule.
The good news is product innovation is closing some of that gap. The London Market is driving the global clean energy shift, with Lloyd’s capacity backing over US$1.5 billion in resilience and transition-related risks. Parametric insurance, insurance-linked securities, and EIOPA’s concept of impact underwriting are all gaining ground.
Check out our industry icons special report to get to know the people leading climate risk practice in the UK.
Climate risk is no longer an emerging concern. It is a present and measurable financial risk reshaping underwriting, capital, governance, and product design. The protection gap is widening, regulatory expectations are tightening under SS5/25, and the distance between best-practice firms and laggards is becoming a competitive line.
Insurance professionals aren’t passive recipients of climate trends. Underwriters, risk analysts, governance leads, and board members all hold direct levers on resilience, pricing, and disclosure. The firms that build climate risk into every part of the balance sheet will keep writing the cover clients need. The ones that don’t will face shrinking books and rising capital costs.
