Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Insurers are turning to private capital firms and hedge funds to cover billions of dollars’ worth of potential damages to data centres, as they struggle to offer sufficient coverage for sprawling AI investments.
Multiple brokers and a large property insurer said they were setting up catastrophe or “cat” bonds and special-purpose vehicles for alternative investors, as lenders looking to fund the building of data centres struggle to find enough insurance cover for risks such as fires, floods and cyber attacks.
The value of the projects has soared into the tens of billions of dollars, dwarfing the coverage available and prompting insurance companies to turn to alternative investors to cover lenders and tech companies.
“The demand [for insurance] is huge. How do we create enough supply? We will need to tap new sources of capital,” said Laurent Rousseau, head of Emea at reinsurance broker Guy Carpenter.
Lenders to data centres are worried about fire and flood damage, loss of high value chips and also seek cover against project cancellations, construction risks and interruptions to power and water supplies.
Joe Peiser, head of risk capital at broker Aon, said insurance-linked securities for data centres “will be needed to meet all the demand that’s coming”.
Investors in the broader cat bond market have been attracted to its higher yields compared with corporate and government debt. Insurers and other companies issue cat bonds and pay investors to assume some of the risks. If a disaster occurs, bondholders can lose their money.
Hedge funds, private capital firms and even retail investors have signed up for cat bonds, driving record sales in recent months.
Insurers are now considering issuing cat bonds that would cover up to $1bn in property damage for a single data centre or a portfolio of data centres, brokers said. These would probably target the most damaging natural disasters such as earthquakes or hurricanes.
Insurers are also preparing to create alternative capital investment vehicles that will allow investors to cover other types of risks, such as cyber attacks and business interruption.
A data centre cat bond providing up to $1bn in coverage would yield at least 2 percentage points above comparable government bonds, which are perceived to be safer, Rousseau said.
The securities were best suited to investors specialising in riskier and higher-yielding assets, he said, because data centres were attractive targets for attacks and faced uncertainty over long-term demand for computing power and storage.
“If we realise the demand is not going to be there, the economic viability of these projects is going to be questioned,” he said, adding that “these are strategic assets, so they can become targets in an unstable geopolitical environment.”