As data center exposure continues to grow, it is placing significant pressure on the insurance industry to address these challenges. In light of this, Jason Bolding from Gallagher Securities has emphasised that the growth will require a blend of traditional insurance, reinsurance, captives, catastrophe bonds, and sidecars to effectively fill the widening protection gap.
Bolding, who serves as CEO of Gallagher Securities, the insurance-linked securities (ILS) and capital markets broker-dealer division of reinsurance broker Gallagher Re, recently spoke to Artemis about the necessity for increased risk capital to facilitate the development of data centers, and how ILS can play a crucial role in this process.
“Data centers combine a wide range of exposures on a scale that could lead to bottlenecks including not only property but also cyber, construction liability, construction surety, title insurance, general liability, power outage, and residual value,” Bolding told Artemis.
He continued: “For traditional ILS investors, I think the natural starting point is peak peril cat exposure. The market is very familiar with these risks, and investors have demonstrated that they can support significant limits covering standard cat perils.”
Given this, Bolding went on to suggest that this opportunity could also end up attracting a broader set of investors than the industry typically sees within the catastrophe bond market.
At the same time, as the data center sector continues to grow, the CEO suggests that the market may also see a wider range of investors who view insurance risk as another way to participate in what Bolding describes as “one of the most significant infrastructure build-outs of our time.”
Attention then turned towards the sidecar market, which has seen a heavy influx of momentum in recent years.
“Beyond that, I see sidecars as a particularly interesting solution, allowing investors to participate alongside established carriers with full alignment of interest while gaining exposure to a broader mix of data-center risks,” Bolding explained.
To conclude, Bolding stresses that the industry will need to turn towards utilising additional sources of capital to withstand the data center buildout.
“Data center exposure is becoming too large for traditional insurance capacity alone, and the industry will need additional sources of capital.
“Ultimately, I don’t think there will be one solution. It will be a combination of traditional insurance, reinsurance, captives, cat bonds, sidecars, contingent capital, and other forms of institutional capital working together to fill what is clearly becoming a significant protection gap,” the CEO added.
Bolding’s comments echo similar views of rating agency S&P, who recently indicated that as capacity constraints are likely to limit the insurance industry’s ability to fully insure hyperscale data center projects, this will likely lead to greater use of self-insurance through captive insurers, and potentially, alternative capital such as insurance-linked securities (ILS).
Read other Artemis articles about the data centre risk transfer opportunity for ILS here.
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