Brandan Holmes, senior credit officer at Moody’s, said one of the key challenges facing the insurance and reinsurance industry is managing, assessing and pricing data center risk, noting that historical data is limited and modeling is complex due to a variety of unique engineering and risk factors.
During Moody’s Ratings’ virtual media briefing, Holmes emphasized that the company sees data centers as a significant opportunity for commercial insurers and reinsurers, but also an area of ​​risk. He stressed that there are many factors to consider when trying to manage or price this risk.
“This is an area that doesn’t have a lot of historical data, and if we look at it just from a physical risk perspective, the risk of a weather event disrupting these data centers is challenging due to the geographic concentration and the high-value nature of the equipment inside.
“On top of that, the equipment has a fairly short useful life, so the scrap rate is pretty low. So, realistically, modeling valuations is very challenging and different from other things besides the physical hazard. That’s one of the biases that the industry is trying to address,” Holmes said.
He also highlighted cyber risk as another issue related to data center insurance.
“There are two elements of cyber risk. One is obviously the risk to the software, and the other is the risk of a cyber attack compromising the physical infrastructure of the data center. So if you think about something like a cooling system, if a cyber attack knocks out the cooling system, that could have a significant impact on the chips and equipment in the data center. Likewise, fire suppression systems could be compromised, sprinklers spraying water on equipment. So there’s a lot of unique engineering and risk elements here that make modeling this complicated,” Holmes explained.
Additionally, Holmes highlighted that another challenge Moody’s has observed in the market is providing sufficient production capacity.
“Some data centers, especially hyperscale data centers, require a lot of coverage, and centralized locations are worth $10 billion to $20 billion, which makes providing coverage particularly difficult,” he said.
Holmes continued, “We’re seeing syndicates or groups of insurance companies come together, often arranged by large brokers, to provide sizable coverage. So, that’s what’s happening.”
Still, despite these challenges, Holmes noted that the insurance industry has a strong track record of adapting to new and complex risks, and Moody’s believes data centers are no different in this regard.
Regarding Moody’s outlook on the data center opportunity set, Holmes said: “We expect data center investment to be at least $3 trillion over the next five years.
“In terms of premiums, we haven’t estimated that ourselves, but if you look across the industry, there are reports that cumulative premiums related to data centers over the next five years are going to be $130 billion. That’s a meaningful potential premium stream for the insurance industry. And a lot of that is going to commercial insurers and reinsurers.”
Holmes added that while there has been no progress so far, Moody’s expects alternative reinsurance capital to play an important role in providing capacity to data centers.
