Climate Change and UK SMEs: How Insurance is Evolving

Climate change is already reshaping the UK’s weather patterns and environmental conditions. For UK small and medium-sized enterprises (SMEs), this brings new risks to property, operations and liability exposures. Understanding how the climate is projected to change is the first step in planning for a resilient business.

Short-Term (Next 5 Years)

Hotter summers and more heatwaves: The UK experienced its hottest year on record in 2022, with temperatures exceeding 40°C for the first time. The frequency of very hot days (over 30°C) has tripled between 2013 and 2023 compared to the 1961–1990 average (Met Office, 2022).

Wetter winters and surface flooding: Increased winter rainfall is leading to overwhelmed drainage systems and localized flash floods, particularly in urban areas (Environment Agency, 2024).

Increased storm activity: Climate change is contributing to more frequent and intense storms, resulting in greater risks of flooding and infrastructure damage (HM Government, 2022).

Subsidence risk: Hotter, drier summers are drying out clay soils, increasing the risk of subsidence, especially in southern England (HM Government, 2022).

Medium-Term (To 2040)

More extreme weather events: The UK is projected to experience more variation in rainfall and temperature, with increased occurrences of droughts, flash floods, and sudden freezes (HM Government, 2022).

Rising average temperatures: Summers could be 1.5–2.5°C hotter on average, raising the risk of heat stress and fire hazards (HM Government, 2022).

Changing rainfall patterns: Winter rainfall is expected to increase by up to 15% in many areas, elevating the risk of river and coastal flooding (DEFRA, 2022).

Insurance market adaptation: Underwriters are shifting to forward-looking risk models, using high-resolution flood and heat mapping. Premiums and exclusions are beginning to reflect projected future risks rather than past loss history (HM Government, 2022).

Long-Term (To 2070 and Beyond)

Sea level rise: Coastal and estuary towns face growing flood risks from storm surges and sea encroachment. Some areas may become uninsurable (Environment Agency, 2022).

Infrastructure disruption: Power, transport, and water systems will face new climate stresses, raising the risk of indirect business interruption (HM Government, 2022).

Erosion of insurability: In high-risk zones, insurance may become unaffordable or unavailable, influencing property values, finance access, and regional business viability (HM Government, 2022).

Climate litigation and liability: As expectations for business adaptation rise, SMEs could face legal risks for failing to manage known hazards, such as not protecting staff during heatwaves (HM Government, 2022).

How Climate Change is Affecting Commercial Insurance for SMEs

UK insurers are already responding to climate change, adjusting premiums, exclusions and underwriting in light of new risk realities. For SMEs, this is reshaping what cover is available, how much it costs, and what protection it offers in practice.

Property Insurance

Flood and storm risk: Flood-prone or coastal properties may face higher premiums, larger excesses, or conditional cover (e.g. flood defences required). Some SMEs report difficulty obtaining any affordable flood cover.

Subsidence claims: Hotter, drier summers are leading to a rise in subsidence claims in southern and eastern England. Insurers may impose higher subsidence excesses or request maintenance records.

Premium pressure: With weather losses increasing, commercial property premiums are trending upwards, especially for at-risk postcodes.

“For the final quarter of the year, claims for damage to homes from adverse weather reached £146 million – making it the seventh consecutive quarter that weather-related claims have been above £100 million. The quarterly claims figure is also £17 million more compared to claims paid for the same type of damage in Q4 2023.”

Business Interruption (BI) Insurance

More frequent disruptions: Floods, storms and heatwaves are triggering more BI claims. Power outages, blocked access and damaged stock are now common triggers.

Coverage gaps: Many SMEs wrongly assume BI cover applies to all disruptions. In fact, most policies require physical damage as a trigger. Additional extensions (e.g. loss of utilities or denial of access) are often needed.

Longer recovery times: As events become more severe, recovery periods are longer. SMEs should check if their indemnity period is long enough.

Liability Insurance (Public and Employers’)

Premises safety risks: Poor weatherproofing, slips, falling signs or trees in storms can all lead to public liability claims.

Staff exposure: Employers’ liability claims could arise if staff suffer heat stress, are injured during storms, or are expected to work in unsafe conditions.

Emerging risks: Insurers are watching for claims related to extreme temperature exposure, especially where businesses have not adapted or mitigated known risks.Insurers may penalise businesses that fail to implement reasonable adaptations, such as shaded work areas or storm-proofing.

Insurance Availability and Market Shifts

Risk-based pricing: Insurers are moving toward postcode-level risk assessment. Two neighbouring businesses might see vastly different premiums.

New exclusions and conditions: Expect tighter wording, higher excesses and stricter cover terms for weather-linked perils.

Access to cover: Some high-risk businesses (especially in flood zones) may find insurance harder to obtain. Unlike homeowners, SMEs are not covered by the government-backed Flood Re scheme.

Adaptation incentives: Insurers increasingly reward climate resilience, offering discounts or favourable terms for flood defences, risk assessments, or green upgrades.

“ESG (environmental, social, governance) risks will have an increasing impact on SMEs’ insurance policies. It will undoubtedly lead to more costly insurance or, at worse, insurers might not want to offer a policy to those who ignore ESG issues.”

In short, insurance is still available to most SMEs, but it’s getting more selective, more expensive, and more complex. SMEs that understand their risks and take action are more likely to maintain affordable and adequate protection.