Brandan Holmes, Senior Credit Officer at Moody’s, said one of the main challenges for the insurance and reinsurance industry is managing, assessing, and pricing data centre risks, noting that there is limited historical data and that modelling is complex due to various unique engineering and risk elements.
During Moody’s Ratings’ virtual media briefing, Holmes highlighted that the firm identifies data centres as a significant opportunity for commercial insurers and reinsurers, but also as an area that presents risk. He emphasised that there are many factors to consider when trying to manage or price this exposure.
“It’s an area where there’s not a lot of historical data, and if we look just from a physical risk perspective, the risk of weather events damaging these data centres is challenging due to the geographic concentration, as well as the high-value nature of the equipment inside them.
“In addition to that, you’ve got equipment which has a fairly short life, so the obsolescence rates are fairly tight. So, actually, modelling the valuation in addition to the physical hazard is quite challenging and different to other things. That’s one of the biases that the industry is grappling with,” said Holmes.
He also highlighted cyber risk as another concern associated with insuring data centres.
“You get two elements to cyber risk. One is obviously the risk to the software, but the other is cyber attacks compromising physical infrastructure in the data centre. So, if you think of things like the cooling systems, if a cyber attack were to take out a cooling system, that could have a significant impact on the chips and equipment in the data centre. Similarly, you can have fire suppression systems being compromised, with sprinklers spraying out water over the equipment. So, there are quite a few unique engineering and risk elements here which makes modelling for this quite complex,” explained Holmes.
In addition, Holmes underscored that another challenge Moody’s has observed in the market is providing sufficient capacity.
He said, “Some of the data centres, especially for the hyperscalers, require significant coverage, and you’ve got $10 billion to $20 billion of value in a concentrated location, which makes it especially difficult to provide coverage.”
Holmes continued, “We have seen syndicates coming together, or groups of insurers coming together, oftentimes arranged by the large brokers, to provide fairly large coverage sets. So, that’s something that’s coming into place.”
Nonetheless, despite these challenges, Holmes pointed out that the insurance industry has a track record of adapting to new and complex risks, and Moody’s does not see data centres as any different in that regard.
Regarding Moody’s outlook for the data centre opportunity set, Holmes stated, “We expect at least $3 trillion in data centre investment over the next five years.
“In terms of insurance premiums, we ourselves haven’t put out an estimate on that, but if you look around the industry, there are reports of cumulative premiums reaching up to $130 billion associated with data centres over the next five years. That’s a meaningful amount of potential premium flow for the insurance sector. And again, a lot of this is going to flow to commercial insurers and reinsurers.”
Holmes added that although nothing has materialised so far, Moody’s expects alternative reinsurance capital to play a significant role in providing capacity for data centres.
