How Rising Insurance Prices Affect Banks and Their Customers: A Primer on the Cost of Climate Change

Rising Premiums, Uninsured Properties Leave Banks Exposed

Banks and insurers are increasingly connected through their shared exposure to climate change risk. As global temperatures continue to rise and extreme weather events become more frequent and more costly, insurance cost and availability issues for homeowners and businesses in high-risk areas are leaving banks exposed.

This primer on the intersection of climate risk in banking and insurance offers bank executives and boards key questions to help them assess their readiness to navigate a challenging insurance landscape for the bank’s customers, and consider the adequacy of their risk management practices for customers in high-risk regions.

Although proof of insurance is required to secure a mortgage, a customer’s insurance status can change during the mortgage term without the bank’s knowledge. Because insurance renews annually but mortgages can run for ten years or more (for business properties), banks can encounter risks when a customer’s premiums increase dramatically, when they are unable to secure insurance, when coverage limits or exclusions require them to pay for repairs out of pocket, or when insurability issues impact property values.

With climate change rapidly changing the insurance landscape for homeowners and businesses, bank executives and boards may want to re-examine how insurance is considered in their credit risk management processes, and support customers in building their own climate resilience.