A new report from Standard & Poor’s suggests that growing demand for data center insurance could generate $10 billion in new premiums by 2026, underscoring the market’s growing importance and the scale of the opportunity for the global reinsurance industry.
The ratings agency also said annual investment in data centers could exceed $300 billion by 2027, underscoring the industry’s rapid expansion and growing insurance needs associated with large-scale infrastructure development.
For context, S&P notes that the largest infrastructure construction projects, such as bridges or tunnels, typically require insurance limits of $5 billion to $10 billion.
By comparison, the total insurable value of some hyperscale data centers is estimated to be as high as $10 billion to $30 billion, just for construction, which illustrates the scale of risk associated with these facilities.
“These projects involve a complex ecosystem of very large players, developers and builders, utility providers, equity investors and a growing number of public and private lenders, each with their own insurance requirements. This represents a significant growth opportunity for commercial and specialty re/insurers involved in these projects,” S&P added.
The rating agency also observed that insurance companies’ investments in data centers may far exceed the construction value. In addition to physical structures, assets such as IT equipment and related infrastructure also account for a significant portion of the total insured value.
S&P continues, “Insurers may also underwrite many other risks in addition to those involving physical assets. Risks such as business interruption due to system outages, power dependence, and operational disruptions may be as significant, or even more serious, than risks involving physical assets, further broadening the opportunities and challenges for insurers.”
Elsewhere in the report, S&P said capacity constraints could limit the industry’s ability to provide comprehensive insurance coverage for hyperscale data center projects, given their size and complexity.
The agency added that the market increasingly relies on cooperative structures arranged by specific insurers or insurance brokers, in which multiple insurers and reinsurers work together to share risk.
S&P said these arrangements help close the gap between available capacity and growing demand, while also supporting more standardized and efficient insurance for complex risks involving multiple stakeholders.
“As hyperscale data center development accelerates, we expect these collaborative structures to play an increasingly important role in scaling the insurance market’s response. Additionally, we expect alternative capital to begin providing capacity as the market develops,” S&P added.
The company’s report concluded: “We expect insurers to maintain strict underwriting discipline when assessing increasingly large and complex risks, particularly given limited historical loss data and the changing nature of risk.
“Hyperscale projects introduce additional complexity compared to traditional infrastructure due to their rapid construction times; the value of assets, especially technical equipment, is enormous; and the sources of aggregate risk are diverse given the potential number of stakeholders involved at each site. Sources of aggregate risk include supply chain disruptions, natural disasters and cyber threats.
“The campus-like nature of data centers and their concentrated geographic distribution further exacerbates these risks. We expect the most sophisticated insurers with the technical expertise, modeling capabilities and balance sheet strength to offer coverage at scale will be the leaders in underwriting data center risks. This is what we are seeing in cyber insurance.”
