Why insurers are turning to hedge funds to cover AI data centre risks

As billions flow into AI data centres, insurers are turning to hedge funds and private investors through catastrophe bonds to help cover disasters, cyber attacks and other risks

As global spending on artificial intelligence (AI) infrastructure accelerates, the insurance industry is struggling to keep pace with the scale of risks linked to massive data-centre projects. With traditional coverage proving insufficient, insurers are seeking help from alternative investors such as hedge funds and private capital firms to share financial risks, according to a report by The Financial Times.

 

Insurance companies and brokers are creating catastrophe bonds, often known as “cat bonds”, and special investment vehicles to attract alternative capital. These instruments allow investors to take on part of the potential losses linked to large data-centre developments.

 

Brokers and a major property insurer said lenders financing new data centres are driving this move because they cannot secure enough insurance protection against risks like fires, floods or cyberattacks, the news report said.

 

 

The size of many new projects has reached tens of billions of dollars, far exceeding the coverage insurers can provide on their own. This gap has forced the industry to explore additional funding sources.

 

What are cat bonds?

 

Catastrophe bonds, or cat bonds, are special financial instruments used by insurance companies to manage risks from major disasters like hurricanes, earthquakes, or floods.

 

Investors buy these bonds and earn interest payments. However, if a defined disaster occurs and leads to large losses, insurers can use the invested funds to pay claims, meaning investors may lose part or all of their money.   

 

Risks linked to large data centres

 

Banks and other lenders financing data-centre construction are worried about multiple potential risks. These include fire or flood damage, loss of expensive semiconductor chips, project cancellations, construction delays and disruptions to electricity or water supply.

 

The news report quoted Joe Peiser, head of risk capital at insurance broker Aon, as saying that insurance-linked securities tied to data centres are likely to become more common as demand for coverage increases.

 

Growing interest in catastrophe bonds

 

Cat bonds have gained popularity among investors in recent years because they offer higher returns than government or corporate bonds. Through these securities, insurers transfer part of their risk to investors, who receive interest payments in return.

 

However, investors can lose some or all of their money if a specified disaster occurs.

 

Hedge funds, private equity firms and even some retail investors have increasingly bought such bonds, pushing sales in the market to record levels in recent months.

 

New instruments for data-centre risks

 

Industry brokers, as cited by the news report, said insurers are considering issuing cat bonds that could provide as much as $1 billion in coverage for a single data centre or a group of facilities. These bonds would mainly focus on severe natural disasters such as earthquakes or hurricanes.

 

Insurers are also planning alternative investment structures that would allow investors to take on other risks, including cyber attacks and disruptions to business operations.

 

Strategic assets in an uncertain world

 

Despite strong growth prospects, data centres still face several uncertainties. They can become attractive targets for cyber or physical attacks, and questions remain about whether long-term demand for computing power and data storage will match the huge investments being made.