As hyperscale data center campuses push total insured value during the construction phase into the $20 billion to $50 billion range, the market is adapting to gradual changes in asset size, with S&P highlighting the opportunities for reinsurers to grow but also become increasingly selective.
A new report from the ratings agency suggests that as capital expenditures per site on hyperscale data center campuses continue to expand, it may become increasingly difficult to obtain full insurance coverage compared with traditional data centers.
“This insurance gap may increasingly serve as a capital structure constraint, where available insurance coverage supports the portion of an asset’s value that lenders may believe can be recovered in a downside scenario,” S&P explains.
This exceeds the historical ability of the traditional property and buildings insurance market to provide comprehensive alternative coverage in a single location, meaning restrictions are primarily focused on physical buildings and physical asset developments.
As a result, S&P observes that data center insurance is increasingly structured through tiered plans based on probable maximum loss (PML) or maximum foreseeable loss (MFL), which may cover only a portion of the total project value, leaving greater exposure outside of insurance coverage than is typical for large infrastructure.
The rating agency continued, “PML and MFL differ in the extent of potential damage and the assumptions made during the assessment process. PML assumes partial compromise of safety measures during a loss event, while MFL predicts a more severe, worst-case scenario in which all safeguards fail completely.”
“A tiered layout consists of multiple insurance companies across different tiers, allowing each insurance company to attach at specified loss levels and deplete within specified limits. This structure allows for higher overall coverage limits than any single insurance company would typically offer on its own.”
S&P’s new report on the matter also highlights that aggregation risk has become a key constraint for insurers, with large campuses concentrating large amounts of insured value in a single location and risks accumulating during the construction and operational phases.
“Multi-phase developments complicate the situation because large data center campuses are built in phases rather than all at once. Coverage must dynamically adjust as new buildings come online, requiring ‘stacking’ restrictions across construction phases and transitioning to operational property coverage,” S&P added.
While this changing risk profile challenges traditional underwriting frameworks, the ratings agency said hyperscale data centers still present a growing but increasingly selective opportunity for insurers and reinsurers.
S&P continues, “While overall insurance capital remains substantial, capital deployment to insure hyperscale campuses has become more selective, with a greater emphasis on risk engineering, exposure transparency and portfolio-level accumulation controls, particularly as reinsurers face limited visibility into ceded portfolios.
“Tight underwriting for partial coverage, higher attachment points, and controlled business interruption and technology obsolescence risks can support a predictable loss profile despite rising asset values and coverage.”
Looking ahead, S&P said that from a credit perspective, where exposures are substantial, strict participation is likely to be neutral to positive as long as aggregation is carefully managed.
Key credit considerations reportedly include capital adequacy in severe loss scenarios, transparency of accumulated risk, and underwriting governance.
