Flood Re CEO: Banks Must Face Flood Risk Reality

The chief executive of Flood Re, the UK's flood insurer of last resort, has launched a scathing critique of major mortgage lenders for their failure to adequately prepare for climate-driven flood risks. Speaking in March 2026, the CEO warned that banks—including Barclays, Lloyds, NatWest, and HSBC—are using government-backed insurance as a crutch rather than implementing meaningful risk reduction measures.

The accusation strikes at the heart of a deepening contradiction in UK financial regulation: while the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have intensified climate risk scrutiny, mortgage lenders continue to extend credit in high-flood-risk properties without proportionate due diligence or incentive structures that might drive adaptation.

With Flood Re's current mandate set to expire in 2039, the insurance pool faces escalating claims and mounting political pressure. The CEO's intervention signals a critical juncture: either the banking sector voluntarily embraces climate risk management, or regulators will be forced to impose harder constraints on lending in flood-prone areas.

The Flood Re Model Under Strain

Flood Re was established in 2013 following the devastating winter floods of 2012-13, when insurers withdrew cover from high-risk properties. The scheme operates as a mutual pool backed by the government and funded through a levy on all household insurance policies, effectively socialising flood risk across the entire insurance market.

The model has worked—at least superficially. According to Flood Re's own data, the scheme now covers over 600,000 high-risk properties, ensuring that homeowners in flood-prone areas can obtain insurance at affordable rates. This prevents a destabilisation of the housing market and protects lenders' security interests in mortgaged properties.

However, the scheme was never intended as a permanent fixture. The original expectation was that climate adaptation, stronger building regulations, and natural resource management would gradually reduce the pool of uninsurable properties. Instead, the opposite has occurred.

Official Environment Agency flood risk maps show that approximately 5.2 million properties in England are at some risk of river or coastal flooding. Of these, roughly 2 million face a higher probability of flooding (greater than 1 in 30 annually). As climate change accelerates, the number of high-risk properties is projected to increase significantly. Flood Re's own actuarial models suggest that without intervention, the scheme's liabilities could exceed £10 billion by 2035.

The CEO's frustration stems from a simple observation: if mortgage lenders took climate risk seriously, they would either refuse lending in the highest-risk areas, require substantial equity contributions, or impose risk-weighted mortgage premiums that disincentivised purchasing in flood-prone locations. Instead, Barclays, Lloyds, NatWest, and HSBC—which together hold approximately 70% of the UK mortgage market—continue to lend freely, secure in the knowledge that Flood Re will backstop insurance costs.

Banking Sector Incentives and Regulatory Gaps

From a lender's perspective, the logic is straightforward: mortgage origination and servicing generate fee income, while the tail risk of catastrophic climate events falls on insurance pools and ultimately taxpayers. The FCA's rules require lenders to manage interest rate risk, credit risk, and liquidity risk meticulously. Climate risk, by contrast, has only recently entered the regulatory framework.

The PRA's climate risk framework, introduced in December 2021 and updated in 2024, requires large lenders to stress-test their portfolios against climate scenarios. However, the framework stops short of imposing hard lending restrictions or risk-weighted capital requirements based on property flood risk. A bank that originates £1 billion in mortgages in Doncaster or Nottingham—both areas with significant flood exposure—faces identical regulatory capital charges as one concentrating its book in low-risk southern England.

The FCA's consumer protection mandate has similarly failed to translate into meaningful guardrails. In 2023, the regulator's thematic review of climate risk in financial services noted that many lenders lacked adequate climate risk disclosure and had not stress-tested mortgage portfolios comprehensively. The FCA issued guidance but stopped short of enforcement action against major institutions.

This regulatory ambivalence creates a perverse incentive structure. A mortgage broker originating a £250,000 loan on a property in a flood zone 2 area generates the same commission as one in a flood zone 0 property. The broker has zero downside if that property floods five years after sale. The homeowner bears the insurance cost (capped by Flood Re), while the lender faces only credit risk if the homeowner cannot service the mortgage.

Critically, no major UK lender currently adjusts mortgage pricing based on flood risk. When the BBC's Money Box programme surveyed the Big Four banks in early 2025, none could articulate a climate risk premium or even confirm that flood risk was embedded in their underwriting models.

Specific Criticism of Major Lenders

Flood Re's CEO has not named specific institutions in recent public comments, but the contours of the critique are clear from regulatory filings and industry analysis:

• Barclays holds approximately £120 billion in residential mortgages. The bank's 2024 annual report mentions climate risk in governance terms but provides no data on flood risk concentration in its mortgage portfolio or pricing adjustments for high-risk properties.
• Lloyds Banking Group (which includes HBOS, Cheltenham & Gloucester, and other franchises) is the UK's largest mortgage lender by volume. Despite owning properties in flood-prone regions including areas of Yorkshire, the Midlands, and the South West, Lloyds's climate risk disclosures remain generic and lack property-level granularity.
• NatWest Group has explicitly aligned itself with net-zero commitments but has not translated this into mortgage underwriting. The bank continues to lend throughout flood-exposed postcodes in Scotland, Northern England, and Wales without apparent risk adjustment.
• HSBC, as a globally systemically important bank, faces more stringent climate stress-testing but has applied this framework primarily to commercial real estate and emerging market climate risks rather than UK residential mortgage books.

The absence of differentiated pricing or lending restrictions suggests either that these lenders have systematically underestimated flood risk or that they have rationally concluded that flood risk is adequately socialised and therefore immaterial to their risk management frameworks.

Regulatory Pressure and the Countdown to 2039

The political economy of Flood Re's expiration date adds urgency to this debate. When the scheme winds down in 2039, either the insurance market must be willing to cover high-risk properties at market rates, or those properties will become effectively uninsurable. Neither outcome is palatable to politicians or voters.

If insurance premiums spike to economically rational levels—potentially £500-£1,000 annually for a property in a flood zone 3 area—the political backlash will be severe. Homeowners will demand government intervention or subsidies. Lenders will face borrowers unable to afford mortgages because insurance costs have become prohibitive. The housing market in flood-prone regions could contract sharply.

Alternatively, policymakers could extend Flood Re's mandate beyond 2039, effectively cementing permanent government subsidy of flood insurance. This would undermine incentives for both individual homeowners and lenders to invest in adaptation, flood-resistant construction, or risk reduction.

The third path—encouraging lenders to reduce their flood risk exposure voluntarily—requires that banks face consequences for irresponsible lending. This is where regulators must act. The PRA and FCA have indicated that they will tighten climate risk requirements in 2026 and beyond, potentially requiring lenders to hold additional capital for climate-sensitive assets or to disclose concentration risk in high-flood-risk postcodes.

A Bank of England consultation paper published in 2024 explicitly asked whether residential mortgage portfolios should face differentiated capital requirements based on climate risk. The fact that such a question is even being posed reflects the growing impatience of regulators with the banking sector's climate risk posture.

The Broader Climate Risk Narrative

This dispute between Flood Re and mortgage lenders is emblematic of a wider tension in UK financial regulation. Over the past five years, regulators have established a clear hierarchy of climate risk concern: first, energy transition risks in equity and bond markets; second, stranded asset risks in commercial real estate and infrastructure; third, physical climate risks in insurance and mortgages.

The third category has been neglected partly because it is geographically dispersed and politically sensitive. A bank's exposure to carbon-intensive utility companies can be managed through portfolio rebalancing. Exposure to flood-prone residential properties is embedded in the UK's social geography and cannot be easily unwound without triggering housing market disruption.

Yet the physical risks are accelerating faster than many models predicted. The winter of 2023-24 saw exceptional rainfall across much of the UK, with the Environment Agency recording multiple instances of once-in-100-year precipitation levels occurring in consecutive years. Climate scientists have now concluded that the frequency of extreme precipitation events is increasing in line with global warming, not decades ahead of schedule but within current climate models.

Flood Re itself has published analysis showing that claims frequency is rising. In the scheme's early years (2013-2016), annual claims averaged around 20,000. By 2024, this figure had climbed to approximately 45,000 annually, despite Flood Re's active risk reduction programme encouraging property-level mitigation.

This trend will accelerate the scheme's insolvency trajectory. Without lender intervention—either through pricing adjustments, reduced lending in high-risk areas, or voluntary capital contributions toward adaptation—Flood Re faces a deteriorating position and ultimately a call on the UK Treasury.

What Should Lenders Do?

The CEO's implicit prescription for mortgage lenders involves three elements:

1. Risk-adjusted pricing: Mortgages in high-flood-risk postcodes should carry higher interest rates or arrangement fees proportional to the expected cost of insurance and heightened default risk.
2. Enhanced due diligence: Lenders should commission flood risk assessments before originating mortgages and require borrowers to implement mitigation measures (property-level protection, resilient construction) as a condition of lending.
3. Capital commitment: Lenders should contribute to adaptation funds or Flood Re's capital base, aligning their financial interests with risk reduction rather than socialisation.

None of these measures is unprecedented. Dutch lenders have long factored flood risk into mortgage underwriting, given the Netherlands' extensive flood exposure. Australian banks implemented climate risk pricing following the 2019-20 bushfires. The technology to assess property-level climate risk is mature and commercially available through providers such as JBA Consulting and Climate and Weather Impacts Associates.

The barrier is not technical but political. UK lenders have collectively decided that climate risk is not yet a binding constraint on their business models. Until regulators impose hard requirements or the market disciplines them through capital costs, this calculus is unlikely to change.

Looking Forward: 2026 to 2039

The next chapter of this debate will unfold over the next 13 years, with 2026-2027 marking a critical decision point. If the FCA and PRA impose more stringent climate risk requirements without specific reference to residential mortgage flood risk, they will have missed an opportunity. If they do impose differentiated capital or pricing requirements, mortgage lenders will face genuine incentives to reassess their flood risk exposure.

The housing market's response will be telling. If lenders begin to restrict mortgages in flood-risk areas or price them significantly higher, house prices in those regions will adjust downward, ultimately pricing in climate risk. Homeowners and buyers will face a difficult choice: invest in property-level flood defences (which typically cost £30,000-£100,000 for comprehensive retrofitting) or accept lower property values and higher insurance costs.

Local authorities and national governments will then face pressure to invest in catchment-scale and coastal defences—the more economically efficient solution but one requiring sustained capital expenditure. The Environment Agency's forward plans suggest that current spending on flood defences (approximately £3 billion annually) will need to double by 2035 to keep pace with climate risk.

The CEO's public criticism of mortgage lenders is therefore not merely a corporate grievance but a signal that the current settlement—in which private lenders originate credit freely and public institutions socialise risk—is unsustainable. The question is whether regulators will act before Flood Re's crisis becomes acute, or whether political pressure will force a more costly intervention downstream.

For CEOs in the financial services sector, the implication is clear: climate risk management in mortgages is no longer a nice-to-have governance item. It will become a material risk factor and a regulatory compliance imperative within the next two to three years. Institutions that delay action until regulators impose requirements will face higher capital costs and a compressed window to adjust their business models. Those that move proactively now—by embedding flood risk into underwriting, pricing, and portfolio management—will gain a competitive advantage and reduce regulatory friction.

The CEO of Flood Re has thrown down a challenge to the banking sector. The sector's response will determine whether the UK's approach to climate risk in mortgages becomes more sophisticated or drifts further into moral hazard and deferred reckoning.