Data centres: Big tech builds boost demand but caution urged

The exposures behind large data-centre placements will test the industry’s expertise and capacity, says Axa XL’s Greg Schiffer.

Key points:
Data-centre aggregation needs work
Claims data informs casualty pricing
Axa XL adds construction resources

Data centres present an immense growth opportunity for insurers and reinsurers – but more work is needed to better understand the underlying aggregation risks before the industry reallocates capacity from other sectors.

That is according to Greg Schiffer, chief executive of Axa XL Reinsurance North America, who sounded caution on the limits insurers should offer on individual data centres. “We need to make sure that we have our arms around the exposure because it’s unprecedented,” Schiffer told APCIA Today.

The scale of these developments represents uncharted territory for carriers, which must move quickly to quantify the potential accumulated exposure. For reinsurers, the challenge is to establish how much exposure they are willing to accept, both on individual project towers and across clustered facilities in the same footprint.

To control their exposure, primary insurers may initially manage their cumulative aggregate exposure internally, while relying on reinsurers to absorb peak losses.

“The reinsurance industry provides the severity protection. But when you’re talking about $15 billion to $20 billion in limits on an individual risk, you start to use all the available capacity very quickly,” Schiffer said.

“It’s important for us to make sure that we understand how much aggregation we have on any one individual risk.”

Clustering compounds the risk

Data centres are exposed to numerous perils, including fire risk, severe convective storms (SCS), hurricanes, floods and wildfire. Geographic clustering compounds the issue. When multiple facilities are built in close proximity, a single natural catastrophe could affect several sites simultaneously, driving up losses.

“We need to ensure we have an accurate handle on our aggregation. It’s also an issue the broader industry needs to get its arms around,” Schiffer said.

That natural catastrophe threat mirrors pressures wider in property lines, where risks such as SCS and wildfires, previously considered ‘secondary perils’, challenge primary carriers. Schiffer said technical pricing needs to adjust across commercial property lines to account for this changing risk landscape.

“A ‘Super’ El Niño occurred thus year, which suppressed Atlantic hurricane formations. But it certainly didn’t limit secondary perils and severe weather across North America more generally. Globally, we had many examples of wildfires and flooding. Year after year, we continue to see 1-in-100-year floods in certain places, which is a bit abnormal.

“Severe convective storms are affecting many of our insureds. Secondary perils are becoming primary perils and that need to be considered as part of the loss cost when we’re pricing property risk,” he said.

Against a backdrop of uncertainty, Schiffer views reinsurers’ core remit as providing predictable, long-term support. For Axa XL, that commitment spans multiple jurisdictions and perils. Maintaining capacity is vital to enable policyholders to purchase coverage in those territories, though Schiffer emphasised that rates must keep pace with proven loss costs.

“The reinsurance industry provides a good portion of the capacity in the market, and we provide a variety of products and services at adequate pricing. We need to make sure we’re paying for the loss cost that is proven,” he said.

“It’s really about being able to continue to be predictable, take a long-term view and provide capacity over the long term, from Texas to Maine, across all US states, to whatever peril.”

Casualty challenges

While the supply and demand dynamics are similar, the casualty market is facing different challenges. Aggressive social inflation, nuclear verdicts and other challenges are making long-tail lines difficult to predict and price with confidence.

Quoting the American Tort Reform Foundation’s definition of “litigation hellholes”, Schiffer said there are problematic jurisdictions throughout the US. Social inflation represents a “moving target” while litigation funding, where an independent commercial investor provides financial resources to pay for a lawsuit, is also a growing problem.

There are some success stories, however, including sweeping tort reforms in Florida, which have made a positive difference to the insurance markets in the state.

“We have had positive feedback from many of our insureds on what is happening in Florida including the transparency now in place around litigation funding. There are also positive green shoots in some other states, but we need more momentum to make sure that we address litigation funding and transparency around it.”

Beyond risk selection, primary carriers are also adapting their internal processes to counter these pressures. Many insurers have adjusted how they manage and reserve for claims, he explained, making granular submission data indispensable for reinsurers seeking to factor those improvements into treaty pricing.

“Data has become a very important part of what we’re asking clients for today, so we can really spot the trend lines they’re telling us about and give them full credit when we’re evaluating their reinsurance programmes.”

Within speciality lines, conditions depend on the specific class of business. Take cyber risk, for instance: there is extensive discussion around the Mythos threat, AI breaking out of its sandbox and the sheer speed of technological change acting as a double-edged sword. “While it (AI) aids us on many fronts, it equally equips bad actors – introducing more uncertainty into the class,” Schiffer said.

State of the market

In construction insurance, Axa XL has expanded its footprint in North America, providing treaty, automatic facultative and facultative support.

“We want to serve our clients through treaty, autofac and facultative, so be global yet local,” Schiffer said. “We have a Centre of Competence, based in Europe, that writes treaty business worldwide, but we also want to have that local hands-on knowledge, and that’s why we’re adding our facultative resources on construction.”

Ultimately, the focus remains on delivering consistency through any cycle and drawing on underwriters’ deep familiarity with their clients to provide value-added insight.

“We continue to deepen our knowledge and understanding of our clients. The more we understand them, the more we can support our clients across multiple programmes that they write. We look to continue to support most of our partners across the board where we can, across lines of business.”

Greg Schiffer is the chief executive of Axa XL Reinsurance North America. He can be contacted at greg.schiffer@axaxl.com 

For more news from the American Property Casualty Insurance Association (APCIA) click here.

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