The growth of cloud computing and the amplified use of artificial intelligence across different industries has fueled the creation of massive, state-of-the-art data centers, and with that, increased the need for innovative property/casualty industry solutions to meet nontraditional insurance exposures.
Data centers, which process and store large amounts of essential information, tend to be warehouse-sized facilities that house computer servers and require significant cooling, power backup, fire suppression and security systems. Initially, their proliferation was seen in the 1990s with the rise of the Internet, but the current expansion is unfolding at a much larger scale and even faster pace, fueled by billions of dollars in private investment and federal directives to fast-track certain projects.
Larger data centers, or "hyperscale" data centers, are drawing the greatest attention and scrutiny because of their size, rapid growth and substantial impact on local communities. Given the customized technology that's in these data centers and the fact that they'll be very hard to replace and difficult to repair, any kind of covered cause of loss that keeps any of these data centers out for any significant period of time would likely cause a significant financial loss, and business interruption is one of the main prospective causes of loss. Contingent business interruption comes into play as well as in these scenarios: it's not just AI companies that would be losing revenue it would also be the clients that are leasing services from these AI companies that are losing their business. Disruptions to data center operations would create a domino effect.
Insurance considerations should come into play from the very start of the planning and building of a data center. Builders' risk exposure is high with the potential for physical damage to the data center during its construction. Supply chain issues or labor shortages that affect the construction industry, especially acute issues in a specific state or region, could be problematic for insurers of data center builders or owners of completed data centers. Depending on the area where these facilities are constructed, they could put a significant drain on locally available skilled labor or construction expertise.
Once built, a data center could experience first-party financial loss stemming from a direct, covered cause of loss; for example, a fire that damages the physical structure, and its interior components (e.g., computer servers and other equipment) and other contents. Because the data centers use servers that generate unprecedented heat loads, the risk of ignition is higher than in traditional large commercial facilities such as warehouses. Physical damage from failed systems outside the data center, such as an off-premises power failure, could create an insured loss as well depending on the property coverage extensions within an insured's policy. Commercial property coverage would also be necessary to cover damages from other natural or man-made disasters.
From a general liability standpoint, any bodily injury or property damage to third parties from a fire or explosion at the facility could create major losses, and from an environmental liability standpoint, if there's any discharge associated with the operation of the center that contaminates the water supply of the surrounding communities, that is another liability exposure.
Another obvious potential exposure to loss concerns cyber. Losses from failed or inadequate cybersecurity could be costly, especially if any of these data centers are housing proprietary, private or sensitive information of any type.
At the same time, data center development can create significant economic opportunities, including numerous jobs for technicians, electricians, facility managers and other local building trade workers. State and local governments can also benefit greatly from property and sales taxes associated with these centers. Overall, the benefits of data centers should ultimately be weighed against public costs.
The risks posed by data centers apply beyond the United States and are generally the same in international markets. These data centers built internationally will also need to satisfy domicile-specific regulations, such as those related to cybersecurity, the environment and diverging online content regulation.
Time will tell if insurance supply can keep up with demand. The sheer size of hyperscale data centers necessitates (re)insurers making determinations concerning their risk tolerance and where their preferred placement is within a layered property insurance program. Innovative structures such as captive formations could become part of the picture, but clearly, as data center development and construction spreads, required insurance coverage should evolve as it is currently beyond what the traditional property/casualty industry has previously experienced. Setting risk tolerances and building a history of loss experience are all factors in developing needed underwriting expertise.
Given the significant capital required to finance data center infrastructure projects, insurers may have exposure on the asset side of their balance sheets through private credit investments, private equity partnerships or other financing arrangements. Insurance investment managers also will need to monitor associated risks closely, including regulatory changes or legislative developments that could affect the long-term performance and viability of these investments.
With AI becoming a more critical component for society in general, how well the headwinds associated with the availability and affordability of energy to power data centers are addressed will be of major importance. Insuring these facilities will continue to be a complex undertaking involving an integration of multiple coverages, some of which will be needed in phases as different stages of data center development are completed.
