Recalibrating climate risk and insurance

IN February, Carbon Tracker and the University of Exeter published Recalibrating Climate Risk — informed by a survey of 60+ climate scientists’ expectations of future damages from climate change. The report urged governments to ‘fix the faulty radar’ of economic climate damage models and found:

• Economic modelling has traditionally linked damages to changes in global mean temperature, but societies and markets experience climate change through local and regional extremes — including heatwaves, floods and droughts — which drive the bulk of economic and financial disruption, yet often barely register in global averages.
• While a useful proxy, gross domestic product (GDP) can mask the real impact of climate change by failing to account for mortality, inequality, ecosystem loss and social disruption. As risks rise, relying on GDP assessments can give policymakers and financial institutions a false sense of resilience, even as vulnerability increases — for example, recovery spending that spikes GDP after a climate-related disaster, masking welfare losses entirely.
• With temperatures trending towards a 2°C future, experts stress that impacts become increasingly unpredictable, as tipping points and tail risks increase. Even as models continue to produce precise-looking point estimates, climate risks will likely undermine model assumptions of continuous growth.

The recent National Security Assessment on nature and biodiversity risks painted an alarming picture of what climate and nature risks could mean for the UK. The government commissioned it, but then tried to limit its release, and it’s only available publicly thanks to the work of journalists.

It’s a working example of the delayed disclosure trap — when institutions withhold disclosure of the full impacts of global warming, because they fear it will spook citizens and/or financial markets.

A related concept applicable to insurance is ‘derailment risk’. This describes a situation where policymakers divert ever more resources to deal with the increasingly severe physical impacts of climate change, thus derailing the work of decarbonising the economy and guaranteeing that climate impacts worsen.

These dynamics, coupled with the increasing risks of breaching climate tipping points give cause for concern, with little to no consideration given to the full range of possible diverging climate futures in the century ahead.

Coastal hazard
My first job out of university was working as a town planner in Hawkes Bay, New Zealand. The year was 2005, and council were introducing a coastal hazard zone, mapping the low-lying coastal areas where ~0.5m of sea level rise with storm surge could erode or inundate coastal properties over the next 10-100 years.

Owners of valuable beach-front properties located in the coastal hazard zone quickly found they could no longer build or extend as of right, with external works subject to planning consent approval and restrictions.

Coastal residents were angry to lose agency over their own properties, with complaints that properties lost value. Worst affected communities demanded the council construct sea walls, while the council argued this was neither technically nor economically feasible at public expense, and their policy would be managed retreat.

Unfortunately, long-sighted planning for future climate realities remains the exception, not the rule, and is under threat globally as populists ignore or reject climate risks as a material factor.

Despite increasing warnings from the scientific community, the risk of breaching climate tipping points and bifurcating climate futures does not currently feature in how we plan and design infrastructure for the century ahead.

Take the scenario of Atlantic Meridional Overturning Circulation (AMOC) collapse for the UK. This circulatory system of warm water in the Atlantic is responsible, among other things, for making the UK and Ireland far warmer than their latitudinal neighbours in Northern Quebec and Labrador. Scientists cannot say for sure when or if this tipping point will be reached, but experts warn of a 50/50 risk of tipping this century.

AMOC tipping would result in extreme UK winter cooling, with winters closer to those in Eastern Canada, driving average temperatures ~7°C lower, with precipitous declines in rainfall severely impacting agricultural output, with short, hot summers providing a brief growing season — decimating crop yields.

AMOC collapse is just one of nine global tipping points. The tipping point for coral reef loss was breached in October 2025.

Like the financial system, the planning system is also vulnerable to future climate risks, through its reliance upon backwards looking weather data informing policy. Scientists warn we urgently need a global assessment of catastrophic but avoidable climate risks such as tipping points.

In 2015, the Paris Agreement was signed as a voluntary treaty to manage emissions, not a legally binding treaty to phase out fossil fuels. As a result, global emissions have continued to climb.

When he was the governor of the Bank of England, Mark Carney’s landmark address at Lloyd’s of London on the Tragedy of the Horizon was laser-sharp in its analysis of the problem of short-termism in financial markets, yet delivered voluntary TCFD disclosure as the solution.

Whilst the Task Force on Climate-related Financial Disclosures precipitated a bull market in climate data, we’ve not seen the required capital reallocation to low-carbon energy, undermining the central premise that disclosure would drive accurate asset repricing and a shift in business strategies.

In Glasgow for COP26 with Carbon Tracker, we witnessed outgoing Carney’s launch of the Glasgow Financial Alliance for Net Zero, to media fanfare — riding the wave of net zero target setting. Rishi Sunak, as chancellor of the exchequer, stood before photographers modelling a green briefcase as if to imply that financial markets “have got this”. Government policy makers duly checked out, with responsibility falling between the cracks of finance, delivery and regulatory departments.

Concrete preparations in the UK have barely shifted beyond the creation of Flood Re, and business-as-usual flood defence funding, falling far short of what is needed to prepare for a world of 1.5°C overshoot and increasing physical climate damage.

A recent Aviva study found one in nine new UK homes are constructed in flood zones. 

Homes increasingly uninsurable by private markets as flood risk increases, yet outside the scope of the insurer-of-last-resort, Flood Re.

Flood Re points out it was only intended to act as the first part of a two-step solution. The second and crucial element, addressing flood resilience at source and property flood resilience, was never sufficiently resourced.

Residential property and critical infrastructure continues to be built without due consideration and design contingency for worsening flood risk, and necessary defences remain underfunded, storing up costly future problems.

Climate adaptation is foundational to the continued functioning of the insurance sector and in turn, all the downstream economic activity that insurance enables.

An endless stream of priorities passes through government, some deserving of urgent attention, some not. But the looming insurability crisis has never been one of them.

In the decade since Paris, the tragedy of the horizon has increasingly become the tragedy of today:

– 2019 bushfires in Australia – 30+ deaths estimated cost $100bn

– Historic 2022 flooding in Pakistan – 1700+ deaths, estimated cost $40bn

– Cyclone Gabrielle 2023 – New Zealand’s costliest non-earthquake disaster strikes Hawkes Bay – estimated cost $13.5bn

– Valencia floods in 2024 – 200+ fatalities, with estimated cost of $3.8bn

– LA wildfires in 2024 – 31 direct, 400+ indirect deaths – estimated cost $250bn+

While costs mount, politicians have failed to act on the required scale, or pace for dealing with the climate crisis, which continues to be framed by economists as a future problem (when we’re all assumed to be wealthier?), rather than a problem requiring urgent action today.

This lack of urgency has come into sharp focus during Carney’s first year as prime minister of Canada, supporting the construction of new oil pipelines and fossil fuel expansion, despite his expert knowledge of the financial risks to markets and society.

The implications of policy failure, both to mitigate climate change, and to adapt to its new, rapidly worsening realities, should concern us all.

A new report by the Institute for Public Policy Research (IPPR) —  Adapt or Die — warns that ignoring climate change risks losing votes on the left and right: 81% of voters believe we are unprepared for its impacts & holds across the voting spectrum, including 83% of Labour’s 2024 voters and 84% of Reform’s 2024 voters. The IPPR recommends better protecting people by pairing policies like solar for schools with adaptation to extreme heat, like air conditioning.

Failure to adapt to escalating extreme weather is creating a governance crisis and leaving space for the populist right to exploit public anger, according to IPPR. Eight out of 10 of England’s most flood-prone constituencies are predicted to switch to Reform UK at the next general election.

Gunther Thallinger at Allianz warns the climate crisis at 3°C of warming is on track to destroy capitalism — with the vast cost of extreme weather impacts leaving the financial sector unable to operate.

The financial sector is uniquely well placed to support climate adaptation and resilience efforts but must now robustly engage on policy in a collaborative, cross-sector manner, ensuring its voice is matched by joined–up government policy actions and investment in the real economy — accelerating mitigation efforts to avoid the worst impacts of climate change.

Joel Benjamin is financial policy and advocacy manager at Carbon Tracker Initiative