As climate risks intensify, financial institutions are facing a growing challenge: understanding how physical hazards translate into financial outcomes.

This is no longer a theoretical question. Recent collaborative work involving the Bank of England, Howden, RiskLayer, and Mitiga Solutions explored how climate-driven hazards can propagate through insurance markets, mortgage portfolios, and broader financial systems, with a particular focus on flood exposure and its downstream financial impacts in the UK.

The broader analytical framework also incorporated hazards such as coastal surge, windstorms, and freezing events to better understand how physical climate risk concentrates geographically and evolves over time.

The analysis examined how physical hazards move beyond direct asset damage to influence insurance affordability, household vulnerability, property values, and ultimately financial stability itself.

Rather than assessing climate risks in isolation, the work focused on understanding how risk propagates across interconnected systems: from physical exposure, to insurance pricing, to mortgage risk and financial stability.

At Mitiga Solutions, our role focused on providing high-resolution, physically grounded climate hazard modelling, vulnerability assessment, and probabilistic loss quantification enabling a more precise understanding of how risks evolve geographically and where concentrations of exposure emerge.

Drawing from our experience within this work, the following sections explore some of the key dynamics shaping how physical climate risk propagates through insurance systems, mortgage markets, and broader financial stability frameworks.

The implications are increasingly clear: climate risk is no longer just an environmental variable, it is becoming a structural component of financial risk.

Key takeaways

• Climate risk propagates through interconnected systems, from physical assets to financial stability
• Insurance affordability remains a critical transmission channel between physical and financial risk
• Flood exposure directly affects mortgage portfolios, household vulnerability, and asset values
• Climate impacts exhibit significant spatial variability rather than a uniform distribution of impacts
• High-resolution, asset-level climate data is essential to understand and manage systemic financial risk

What this analysis set out to solve?

Understanding climate risk at a financial system level requires connecting layers that are traditionally analysed in isolation.

This includes:

• Physical hazards such as flooding, windstorms, coastal surge, and freeze
• Asset-level exposure and damage
• Insurance pricing and affordability
• Mortgage exposure and financial stability

The challenge is not simply modelling each layer independently, but understanding how they interact and propagate through the system.

In this case, climate hazard data was translated into damage estimates, which were then used to assess insurance impacts and ultimately integrated into financial stability models.

This enabled the analysis to move beyond direct physical losses and explore broader questions around insurance protection gaps, household vulnerability, and systemic financial exposure.

More broadly, this type of multi-layer modelling reflects a growing shift across the industry: moving from isolated climate-risk assessments toward a system-level understanding of financial vulnerability.

1. Climate risk does not stay physical; it propagates

Physical climate risk begins at the asset level, but its impacts extend far beyond direct physical damage.

Flood risk, for example, may initially appear as property damage, infrastructure disruption, or business interruption. However, the financial impacts of climate risk often emerge through insurance systems, where increasing exposure can affect:

• Insurance pricing
• Coverage availability
• Long-term insurability

Within this collaboration, Howden Re contributed expertise in insurance markets and risk transfer to help assess how climate hazards can evolve into broader financial vulnerabilities, particularly as insurance affordability deteriorates in higher-risk areas.

As insurance protection gaps widen, the impacts of physical climate risk begin to propagate more broadly across the financial system. This can contribute to:

• Declining property values
• Increased borrower vulnerability
• Growing pressure on mortgage portfolios and credit markets

In practice, insurance becomes one of the primary mechanisms through which physical climate risk translates into financial risk.

As environmental exposure increases, changes in pricing, coverage availability, and insurability can affect far more than the physical asset itself, influencing property values, borrower vulnerability, and broader financial stability.

This reinforces a broader point: climate risk is not confined to direct physical losses, but extends across interconnected systems linking properties, insurers, lenders, households, and financial institutions.

Key takeaway: Physical climate risk becomes financial risk through interconnected mechanisms, with insurance markets playing a central role in how climate impacts propagate across the financial system.

2. Insurance is where climate risk becomes economically visible

Insurance markets play a central role in translating physical climate risk into economic and financial signals.

As flood risk increases, insurance protection gaps may begin to widen, leaving households unable to afford or access adequate insurance coverage.

Under conservative assumptions, the share of UK mortgagors without flood insurance could increase from around 5% today to 7–10% by 2050, rising further following a severe flood event.

Within the collaboration, Howden’s expertise in insurance markets and risk transfer helped assess how changes in insurance affordability and availability can influence broader financial vulnerability.

These dynamics extend far beyond the insurance sector itself. As protection gaps widen:

• Uninsured losses increase household vulnerability
• Rising insurance costs affect affordability
• roperty values begin adjusting to reflect climate exposure
• Borrower resilience weakens, increasing pressure on mortgage portfolios and credit markets

In some cases, insurers may also reduce coverage or withdraw from high-risk areas entirely, a trend already observed in climate-exposed markets such as California.

More broadly, this highlights how insurance markets increasingly function as an early warning system for financial climate risk, making physical exposure economically visible long before impacts materialise elsewhere in the financial system.

Key takeaway: Insurance markets are one of the primary mechanisms through which physical climate risk becomes economically and financially visible.

3. Climate risk is not evenly distributed; it concentrates

One of the most important, and often misunderstood, characteristics of physical climate risk is that it does not necessarily emerge as an immediate system-wide crisis.

At a national level, the overall impact on the UK mortgage system may appear relatively manageable. However, climate risk is not distributed evenly across geographies. Certain regions, communities, and asset clusters face substantially higher exposure to flood risk and insurance stress than others.

In higher-risk areas, climate exposure may contribute to:

• Significant declines in property values
• Larger insurance protection gaps
• Substantially higher credit losses compared to national averages

This means that while the financial system as a whole may appear resilient, specific portfolios or local markets can experience far more severe impacts.

As a result, climate-related financial vulnerabilities may remain largely invisible in national statistics or portfolio averages, while becoming highly material within specific regions or concentrations of assets.

Within the collaboration, Mitiga Solutions’ high-resolution hazard modelling helped identify where these concentrations of exposure emerge and how they evolve over time.

This type of granularity is increasingly critical for insurers, lenders, and financial institutions seeking to understand how climate risk accumulates across portfolios.

Key takeaway: Climate risk may not appear uniformly systemic at a national level, but it can create concentrated pockets of financial vulnerability with significant local and portfolio-level consequences.

4. Understanding financial climate risk starts with modelling the physical layer

Understanding how climate risk propagates through financial systems starts with accurately modelling the physical hazards themselves.

Financial models can estimate downstream impacts on insurance, mortgages, or asset values, but these insights ultimately depend on the quality and granularity of the underlying climate hazard data.

Within this work, we provided high-resolution climate modelling spanning hazard, vulnerability, and probabilistic losses at postcode level across multiple perils.

This included:

• Coastal inundation modelling under present and future climate conditions, combining a high-resolution Digital Terrain Model with sea-level rise, storm surge, ice sheet dynamics, and thermal expansion

• Extreme wind hazard modelling based on regional climate projections and reanalysis data, capturing how windstorm intensity evolves under a changing climate

• Probabilistic loss quantification across climate scenarios and time horizons, generating average annual damage and return-period losses at postcode level

Hazard modelling alone, however, isn't enough to support financial decision-making. Hazard intensities were intersected with postcode boundaries and translated into damage ratios using vulnerability curves that reflect property characteristics such as age, height, and tenure. From there, we generated postcode-level average annual losses (AAL) and return-period loss estimates (1-in-20, 1-in-50, 1-in-100 year) under multiple climate scenarios and time horizons. These outputs flowed directly into insurance pricing and the Bank of England's probability-of-default and loss-given-default models, connecting physical hazard, vulnerability, and probabilistic losses to insurance affordability and credit risk in a single, coherent chain.

The importance of this level of granularity is significant. Two properties located within the same city, or even the same postcode area, can face very different levels of flood or wind exposure depending on elevation, terrain, drainage systems, or proximity to waterways and coastlines. Without high-resolution modelling, these differences can remain invisible, leading to risk being underestimated, averaged out, or mispriced across portfolios.

By translating hazard intensity into asset-level damage estimates, the models formed the analytical foundation for insurance pricing, exposure assessment, and broader financial risk analysis.

A critical insight emerging from this work is that financial climate risk cannot be understood independently from the physical layer. The accuracy of financial risk assessments is directly linked to the quality of the underlying hazard modelling.

At the same time, climate hazard modelling inherently involves uncertainty, particularly around extreme events, behavioural responses, and how climate exposure evolves over time. This makes continuous model refinement and high-resolution analysis increasingly important for financial institutions.

As climate risks intensify, the ability to combine physically grounded modelling with financial analysis will become increasingly critical for insurers, lenders, regulators, and investors.

Key takeaway: Accurate, high-resolution climate hazard modelling is the foundation for understanding financial climate risk.

5. The challenge ahead: from modelling to decision-making

While climate risk modelling capabilities are advancing rapidly, financial institutions are already facing operational and strategic decisions today.

The challenge is no longer simply understanding where climate risk exists, but determining how that information should influence real-world financial decisions.

This includes questions such as:

• How insurers should price or limit coverage in higher-risk areas
• How lenders should assess long-term mortgage exposure
• How portfolios should account for concentrated climate vulnerability
• Where adaptation investments may reduce future financial losses

At the same time, uncertainty remains unavoidable. Future impacts will depend not only on climate scenarios, but also on factors such as insurance affordability, policy responses, market behaviour, and how households and institutions react to increasing risk.

As climate exposure intensifies:

• Insurers are adjusting pricing and coverage availability
• Regulators are monitoring systemic financial vulnerability
• Lenders and investors are increasingly expected to assess forward-looking climate risk

This creates a growing gap between climate risk insight and operational decision-making.

Bridging that gap requires more than modelling alone. Institutions increasingly need:

• Decision-ready outputs
• Integration into financial and insurance workflows
• Asset-level visibility across portfolios
• Continuous monitoring as risks evolve over time

More broadly, this reflects a larger shift taking place across the industry: climate risk analysis is moving from disclosure and reporting toward operational and financial decision-making.

Key takeaway: The next frontier is not simply modelling climate risk, but making climate intelligence actionable across financial systems.

What this means for financial institutions

To effectively manage climate risk, financial institutions increasingly need to move beyond high-level reporting and develop a more operational understanding of physical exposure across portfolios.

This includes the ability to:

• Incorporate asset-level climate exposure into credit, underwriting, and investment decisions
• Monitor insurance affordability and emerging protection gaps
• Identify geographic concentrations of climate vulnerability within portfolios
• Move from backward-looking assessments toward forward-looking climate risk analysis
• Integrate climate intelligence into day-to-day financial decision-making processes

More broadly, this reflects a structural shift already underway across the industry: climate risk is moving from a disclosure exercise to an operational and financial decision-making challenge.

At Mitiga Solutions, we increasingly see financial institutions looking for ways to translate complex climate hazard data into decision-ready insights that can support underwriting, lending, portfolio management, and long-term resilience planning.

As climate risks continue to evolve, the ability to combine physically grounded modelling with financial workflows will become increasingly important across the financial sector.

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Conclusion

Climate risk does not impact financial systems directly, it propagates through a chain of physical, economic, insurance, and behavioural mechanisms.

What is becoming increasingly clear across both industry practice and regulatory analysis is that this transition is already underway.

Insurance protection gaps are beginning to emerge. Risk is being repriced across markets. And financial exposure is becoming increasingly sensitive to physical climate conditions.

The implication is not necessarily an immediate system-wide crisis, but a progressive reshaping of risk distribution across assets, geographies, and portfolios.

Understanding that shift starts at the physical layer.

For financial institutions, the ability to connect climate hazard data to financial outcomes is becoming a foundational capability, not only for disclosure and compliance, but for underwriting, lending, portfolio management, and long-term decision-making.