Decarbonisation is stepping up a gear, but what does it mean for insurers?

Decarbonisation is accelerating across the built environment, bringing new regulatory and cost demands with implications for both construction and buildings insurance. In the wake of the Future Homes and Buildings Standards launch, BCIS executive director James Fiske explores why insurers must adapt quickly to ensure policyholders remain adequately covered, and buildings insurable, in a low-carbon future.

The arrival of the Future Homes and Buildings Standards is new territory, not just for the construction sector but for insurance too, introducing implications for rebuild costs and insurers’ role in the built environment’s decarbonisation.

Regulation and industry standards are shaping a future where the construction, maintenance and eventual demolition of buildings are increasingly energy-efficient and low-carbon.

This shift is necessary but can come at an extra cost to developers, in part due to the introduction of low-carbon materials and technologies designed to reduce embodied and operational carbon.

The immediate responsibility facing insurers is working with clients to understand and accommodate potential cost uplifts within sums insured.

Accounting for changing building costs should already be on the insurance sector’s radar. The cost of building, and therefore rebuilding, is rising and volatility will only accelerate this trend.

This was evident in the way prices responded to Russia’s invasion of Ukraine and the ensuing global energy crisis, and is a risk now due to conflict in the Middle East and disruption in the Strait of Hormuz.

In short, the cost of rebuilding is being influenced by multiple forces – the natural rise in building costs, geopolitical pressures and sustainability-led regulation. In the case of the latter, this is both an immediate and longer-term influence.

For example, when changes to the Building Regulations 2022 were implemented on 15 June 2022, including a requirement for new build homes to produce at least 31% fewer carbon emissions, the ABI/BCIS House Rebuilding Cost Index (HRCI) increased by 4.5%.

Further, between 2021 and 2025, the fixed cost of roof-mounted, photovoltaic panels rose by an estimated £100 per installation. This is according to a comparison of the government’s impact assessment for changes to the energy efficiency requirements of the Building Regulations for domestic buildings in 2021, and the latest impact assessment for the Future Homes Standard.

Higher upfront costs are to be expected for low-carbon buildings and may be compounded by rising demand for certain technologies, such as solar panels, when on-site renewable energy generation becomes a prerequisite for most new homes from 2027.

If the costs of sustainable building represent one side of the coin, the other is the expense of adapting new and existing building stock to the increasing frequency and severity of extreme weather events in the UK.

The latest national assessment of flood and coastal erosion risk⁽¹⁾ in England estimates that more than six million homes and businesses are at risk of flooding from river, coastal and surface water sources. This is expected to rise to eight million by the mid-century.

In some locations, the objective is no longer just to build greener, but to build with climate resilience in mind, particularly in areas vulnerable to flooding where there is a greater need for flood-resistant materials, sustainable drainage and storm management systems, and flood barriers. Again, this could introduce additional, upfront costs that may impact the cost of reinstatement.

The wider point is that the insurance sector has a responsibility to work with clients to understand and reflect these green or climate-resilience cost drivers within policy design. Overlooking this role could leave policyholders more exposed to reinstatement risk and create potential commercial and regulatory challenges for insurers over time.

This is not solely about providing adequate protection. It encompasses a broader responsibility for insurers to ensure modern, more sustainable buildings remain insurable.

Insurers are understandably risk-averse; insuring buildings constructed with low-carbon materials or featuring renewable energy technology remains relatively uncharted territory. In particular, the available claims data for these types of buildings is far more limited than for traditionally constructed assets.

As seen in construction, where uncertainty is priced into tender costs, insurers may respond in the same way – either pricing the perceived risk of newer technologies into higher premiums or, in some cases, avoiding them altogether.

This creates a potential barrier to decarbonisation. If sustainable buildings become more expensive or difficult to insure, it risks slowing adoption and undermining broader policy and industry objectives.

Insurers can begin to address this challenge by developing a deeper understanding of both current and emerging rebuilding cost drivers, using that insight to set clear and realistic expectations with clients around fair pricing.

The transition to a low-carbon built environment will reshape not just how buildings are designed and constructed, but how they are insured. For the insurance sector, the challenge is no longer whether to respond, but how quickly and effectively it can adapt.

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^{(1) GOV.UK – National assessment of flood and coastal erosion risk in England 2024  - here}