Data centres: the next great accumulation challenge

Brokers have a critical role: to help insurers uncover hidden data centre accumulations, improve exposure management and connect growing risks with new sources of capital, says Gallagher Re.

Key points:
Data centre risk spans multiple classes
New capital needed to close the gap
Brokers can help map and manage exposure

By Luca Drane, global data centre lead, Gallagher Re

Few sectors have captured investors and insurers’ attention quite like data centres. Driven by the explosive growth of artificial intelligence, cloud computing, digital infrastructure and rising demand for data processing capacity, the sector is experiencing one of the largest infrastructure build-outs in modern history.

Estimates from McKinsey suggests data centres will require $6.7 trillion worldwide to keep pace with the demand for computer power by 2030. Data centres equipped to handle AI processing loads are projected to require $5.2 trillion in capital expenditure, while those powering traditional IT applications will need $1.5 trillion.

Much of the conversation has understandably focused on the construction of ever larger, higher capacity facilities. Data centres have moved beyond a standard property risk, impacting multiple lines of business including property, business interruption, cyber, surety, trade credit, D&O, renewable energy, third-party and employers’ liability, environmental liability and political violence.

Yet for re/insurers, the more immediate question might be whether they already have significant exposure to data centres without fully understanding the degree of concentration that exists within their portfolios.

As a result, data centres are rapidly emerging as one of the insurance industry's most important accumulation challenges.

Unlike many established classes of business, data centre risk remains relatively immature from an exposure management perspective. The sector is expanding quickly, but there is not yet universal consistency in how these risks are identified, coded, modelled, or aggregated across the market.

This creates a fundamental challenge for insurers seeking to understand their true exposure. In many portfolios, occupancy coding alone is unlikely to provide a complete picture. Data vendors classify data centre risks in a variety of ways, often taking distinct approaches to building values, contents values, tenant exposures and occupancy definitions. As a result, two datasets might produce materially different views of the same portfolio.

For many carriers, the starting point is understanding where exposure exists. Concentrations can develop through geographic clusters or individual facilities whose values continue to grow as assets become larger and more sophisticated.

This is where specialist analytics are becoming increasingly important. By ingesting portfolio data and applying multiple methodologies to identify data centre risks, insurers can develop a far more comprehensive understanding of their exposures. That includes assessing concentrations at both a geographic and a single-site level, identifying areas where portfolios might be overweight, and benchmarking exposure management approaches against wider market practices.

Many insurers are still at the beginning of this journey, with questions around exposure identification, concentration management, risk appetite and growth strategies remaining high on executive agendas.

Gallagher Re is helping clients navigate these questions through a combination of analytics, advisory and risk transfer expertise. Our newly launched Digital Risk practice has a dedicated central team that triages and executes data centre opportunities across the full risk value chain, from facilities through to treaty reinsurance. The team also connects clients with specialists across property, cyber, engineering, capital markets and other relevant disciplines. And, as a global broker, we have a broad view of emerging trends, risk management practices and evolving insurance solutions across the market.

Understanding exposure is only part of the challenge. The scale of data centre growth means the industry will require significantly more risk-bearing capacity if it is to keep pace with demand. Traditional insurance and reinsurance markets will continue to play a critical role, but are unlikely to be the sole source of capital supporting the sector's expansion.

Instead, the future is likely to involve a broader ecosystem of capacity providers. Captives, catastrophe bonds, sidecars, contingent capital structures and other forms of institutional capital all have the potential to contribute toward closing what is becoming a substantial protection gap.

For insurance-linked securities investors, natural catastrophe exposures within data centre portfolios may represent a familiar starting point. Investors have demonstrated a willingness to deploy significant amounts of capital against well-understood catastrophe risks, creating opportunities to support data centre growth through established structures.

“This is not simply another growth opportunity. It is one of the defining risk management challenges of the digital economy.”

There will not be a single solution to the challenge. Supporting the next generation of digital infrastructure will require collaboration across insurers, reinsurers, capital markets participants, technology providers and data specialists. Success will depend on combining deep exposure expertise with access to diverse and scalable sources of capital.

As data centre investment continues to accelerate, the industry's ability to understand, manage and finance these emerging accumulations will become increasingly important.

For insurers and reinsurers alike, this is not simply another growth opportunity. It is one of the defining risk management challenges of the digital economy.

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