The insurance industry’s capacity to cover climate-related losses is now being assessed through a macroprudential lens, rather than just a supervisory one. That is the signal from a speech by James Talbot, executive director for international at the Bank of England (BoE), who warned that widening protection gaps could have consequences for the stability of the financial system as a whole.
The message came in a speech delivered on October 21 by James Talbot, executive director for international at the BoE and the Bank’s Executive Sponsor for climate, at the 2nd Annual Conference on Sustainable Finance at the Banco de México. Talbot set out how physical climate shocks transmit through economies, affecting inflation, output, credit conditions and fiscal buffers. He also argued that insurance penetration is a key variable in determining how severe and how lasting those effects are.
The distinction between insured and uninsured losses, Talbot noted, is not simply a financial one. It shapes how quickly an economy recovers. He drew on the contrast between Spain’s 2024 Valencia floods, where around 250,000 insurance claims were filed and Spain’s Insurance Compensation Consortium had paid more than €4 billion in compensation by late 2025, and Pakistan’s 2022 floods, where only around 1% of total damages were insured. The latter generated larger and more persistent macroeconomic damage, with losses falling directly on households, small businesses and government.
Talbot did not limit the analysis to overseas examples. He cited BoE staff modelling, published in a May 2026 Bank Underground research post, which suggests the share of UK mortgagors without flood insurance could rise from around 5% today to between 7% and 10% by 2050, or up to approximately 16% following a severe flood event. Talbot acknowledged the aggregate effects on house prices and mortgage impairments were relatively small compared with the severe stress scenarios the banking system is tested against. But he was clear the issue was not trivial. "The consequences for affected households, exposed lenders and local economies could still be significant," he said.
The BoE modelling is not a pricing signal, but it reflects the Bank’s view, as macroprudential authority, that coverage gaps have system-level implications. "As a macroprudential authority, we will need to take a broader view of the implications for the financial system as a whole," he said, separate from the Bank’s role in supervising individual firms.
He also pointed to the Bank’s September 2026 Financial Policy Committee record as evidence the issue had already been formally noted at the highest level of systemic oversight.
The speech lands alongside a parallel track of regulatory attention at the Financial Conduct Authority (FCA). Its pure protection market study, launched in March 2025, concluded in September 2026 with the publication of its final report. The study found that around 58% of UK adults hold no life insurance, critical illness cover, or income protection. As part of its remedies package, the FCA is partnering with the Money and Pensions Service, the Protection Distributors’ Group, the Association of Mortgage Intermediaries, and the Digital Property Market Steering Group to widen awareness and access.
The contexts differ. The FCA’s work centres on consumer protection products such as life insurance and income protection, while Talbot’s concerns the physical risk exposure of property and infrastructure. Both, however, point to the same underlying problem: insurance coverage in the UK is not keeping pace with the risks it is supposed to absorb.
David Gray, senior consultant and actuary at Broadstone, said Talbot’s speech highlighted dimensions of climate risk that often receive less attention than the headline inflation narrative. “While discussions of climate risk often focus on the potential for higher inflation, Talbot highlights that the economic effects of physical climate shocks can be more complex,” he said. “Where losses are insured, the economic consequences of physical risks can be mitigated; where losses increasingly fall on individuals, businesses or governments, the effects may be more persistent and widespread.”
Gray added that the speech pointed toward a broader shift in how the industry is expected to frame its role. “Maintaining the availability, affordability and value of insurance is likely to become an increasingly important component of economic resilience in the years ahead,” he said.
Talbot himself was direct on what the industry needs to do. Insurance capacity alone cannot sustainably compensate for underlying risks that continue to rise. Carriers, he argued, will increasingly need to incorporate risk prevention into product design, underwriting and pricing. There may also be scope for greater collaboration between insurers, reinsurers and banks on data, products and risk-transfer mechanisms. Those are not abstract recommendations. They describe commercial decisions that are already in motion across the UK’s growing climate insurance market, where protection gaps in property and flood lines are already shaping capacity decisions.
The BoE’s updated supervisory expectations, published in December 2025 via PS25/25, require banks and insurers to strengthen their climate risk identification, measurement and modelling capabilities. Talbot’s October speech makes clear those expectations sit within a wider institutional view: that the availability of insurance will shape both the economic impact of climate shocks and the environment in which the Bank pursues its price and financial stability goals.
