The insurance industry has rapidly expanded capacity for data center construction, but the next wave of challenges is already emerging as projects grow larger, become operational and increasingly depend on dedicated power generation.
Joe Peiser, CEO of risk capital at Aon, said business interruption, contractor credit and power infrastructure are likely to move higher up the industry’s agenda over the next 12 months.
The risks are being amplified by the extraordinary scale of projects under consideration. While a $2-billion data center would have been considered exceptionally large three years ago, proposed developments are now regularly reaching tens of billions of dollars.
“Now, we’re seeing projects worth $20 billion, $30 billion and $40 billion,” Peiser told Insurance Business. “There are some projects approaching $100 billion around the world,” he noted, with most of the largest projects in the US.
Aon recently increased the capacity available through its Data Center Lifecycle Program, or DCLP, to $5 billion. The average construction value of a facility placed through the program is approximately $1.9 billion, meaning the available limit is sufficient for most developments.
However, Peiser acknowledged that $5 billion may not be enough for every project, particularly as investors become more involved. “Third-party financing often requires more insurance than a hyperscaler would typically buy,” he said. “They would usually take a lot of the risk themselves. But third-party financing may very well come with requirements to buy more insurance.”
Builders’ risk has been the primary focus while much of the data center pipeline remains under construction. However, individual campuses can include multiple buildings that are completed and brought online at different times. As a result, one portion of a development could become operational while construction continues elsewhere, creating uncertainty over where construction coverage ends and operational coverage begins.
It can also result in carriers unintentionally providing two limits across the same development. “One issue insurers have had is understanding their exposure when they are covering both the construction and the operation of a project,” Peiser said.
The operational phase will place greater attention on business interruption, particularly when a hyperscaler owns and operates a facility for its own purposes rather than leasing space to tenants. For leased facilities, expected income can be measured through tenant contracts.
Peiser noted that calculating the financial impact of an outage on an owner-operated facility can be considerably more difficult. “I think that will become an area of debate,” he said.
A parametric product could provide part of the answer by offering a predetermined payment when an agreed downtime trigger is reached. While such coverage might not indemnify the buyer for its entire financial loss, Peiser said it could provide certainty and immediate liquidity. Traditional business interruption claims can take one or two years to adjust. “I think buyers will be willing to trade the amount of coverage for certainty of payment,” he said.
The number of contractors, subcontractors and suppliers involved in large data center projects is also generating greater concern about counterparty failure. Surety bonds and subcontractor default insurance are already available, but Peiser questioned whether the market has enough capacity to support the volume of development planned globally.
He estimated that the overall insurance marketplace for data center business has expanded by approximately 50% over the past year. Similar growth may now be required across surety and credit lines.
Aon is also speaking with catastrophe bond and insurance-linked securities investors about providing additional capital, most likely through reinsurance covering portfolios of projects rather than individual facilities. “I’m pretty confident that, within six to eight months, there will be cat bond investors involved in reinsurance treaties,” Peiser said.
Aon is additionally developing a companion insurance program for the power generation facilities being constructed alongside some data centers. Limited grid availability has prompted larger developers to include dedicated power plants within their projects.
“It is complex, but our industry has dealt with complexity before,” Peiser said. “The difficulty comes when you combine that complexity with the sheer magnitude of these projects.”
