ILS capital providers well positioned to complement re/insurers’ data centre needs: Stahel, LGT

With AI-driven infrastructure growth creating high levels of demand for catastrophe capacity within the re/insurance industry, Michael Stahel of LGT ILS Partners, has called out how alternative capital providers are well positioned to complement the needs that are being imposed onto traditional insurers and reinsurers amongst this build out.

Stahel, who serves as Partner/Portfolio Manager at specialist insurance-linked securities investment firm LGT ILS Partners, spoke to Artemis during the key conference season, to discuss how data centres continue to attract heavy attention within the insurance and reinsurance industry.

He also discussed whether he foresees data infrastructure becoming a meaningful allocation opportunity for ILS investors, as well as how LGT ILS Partners has established a dedicated task force to assess this emerging line of business.

“Data centres are becoming one of the largest new sources of insured property value in the US. The rapid expansion of AI and cloud infrastructure is driving massive investment into hyperscale campuses, creating substantial demand for insurance and reinsurance coverage. Insurance is also a critical component of the financing process, as lenders and investors typically require robust protection before committing capital to these projects,” Stahel explained.

“What makes this particularly relevant for the reinsurance and ILS markets is the combination of scale and accumulation risk. Individual campuses can represent tens of billions of dollars in value and are often located in regions exposed to local weather risk,” he continued.

Adding: “As project sizes continue to increase, alternative capital is well positioned to complement the need imposed on traditional insurers and reinsurers.”

While operational risks, including technology failures, cyber incidents, and equipment obsolescence are primarily managed by specialist insurers, Stahel stressed that large data centre campuses increasingly represent multi-billion-dollar concentrations of value that are exposed to major perils such as hail, severe convective storm, tornado, earthquake and flood.

“Supporting that growing demand for catastrophe capacity is where we believe alternative capital can play a particularly important role,” Stahel told Artemis.

“The most attractive opportunity lies in providing protection against low-frequency, high-severity natural catastrophe events, which are at the core of our investment mandate and a natural extension of what the ILS market has supported successfully for decades.”

Stahel also highlighted how LGT ILS is assessing this emerging business line.

“At LGT ILS, we have established a dedicated task force to assess this emerging business line in greater depth. The objective is to understand the risk characteristics, accumulation dynamics and capital requirements of data centre exposures, and to determine where and how we can prudently allocate capital within this growing market opportunity,” he said.

However, perhaps the biggest challenge that seems to be emerging from data centres is the accumulation risk. Given this, we asked Stahel to explain what makes it so much harder to manage it in this line of business compared to traditional property insurance.

“Many hyperscale campuses concentrate extraordinarily high values within a single location, and entire clusters of facilities are often built in the same regions due to power availability and land economics. Some of the largest recent projects in the US are located in areas exposed to significant tornado activity and elevated hail exposure,” Stahel noted.

“Hence, large severe weather events could potentially affect multiple facilities simultaneously. Understanding and controlling accumulations is the defining underwriting challenge of this business line.”

Looking ahead, Stahel envisions data centres offering meaningful allocation opportunities for the ILS market, especially as projects continue to develop in size.

“The insurance industry is already facing situations where a meaningful portion of data centre values remains difficult to place in the traditional market due to capacity constraints and concentration concerns. In response, the large insurance brokers have established dedicated teams to manage data centre submissions as an individual business line,” he said.

“As project sizes develop and continue to increase, we expect alternative capital to play an increasingly important role alongside traditional insurers and reinsurers. We see this as an attractive emerging source of catastrophe risk transfer demand.

“However, as stated earlier, success will depend on underwriting discipline. Capacity alone is not enough. The market depends on robust risk selection and definition, appropriate coverage structures and strict accumulation management to ensure that the business line remains profitable for both insurers and investors.”

Turning to catastrophe models, while existing model provide crucial starting points for assessing underlying natural hazards, Stahel emphasised that data centres introduce concentrations of value and operational dependencies with unique damage functions that are unlike traditional residential or commercial property portfolios

“At LGT ILS, we are working towards complementing vendor models with our own underwriting assessment of location-specific risks, concentration profiles and portfolio-level accumulations,” he said.

Concluding: “The key is not simply to model the hazard, but to understand how these very large values interact with the rest of the portfolio. Ultimately, data centres require an underwriting approach that combines catastrophe modelling with disciplined exposure management and smart accumulation controls.”

Read all of our interviews with ILS market and reinsurance sector professionals here.