Data centres, the 21st-century warehouses that store the critical IT infrastructure on which many businesses rely, are expanding rapidly. According to the World Economic Forum, there are nearly 12,000 data centres in operation worldwide with the USA leading the way with more than 5,000, while China holds the record for the biggest single data centre site – a 10 million square feet facility in China Telecom-Inner Mongolia Information Park.
However, with that rapid growth comes an increasing demand for electricity, which is already pushing up the need for clean energy and putting pressure on national grids. It also presents a new operational risk, where an interruption to power supply would be debilitating – and that’s where the London insurance market is expected to play a significant role.
Power use
The use of data centres already accounts for 1% of the world’s generated electricity. In the USA, data centres make up to 3-4% of US power demand and by 2030 that figure could rise to as much as 11-12%. With the explosion of new technologies like AI and quantum computing, it’s not hard to see how that power demand will only rise. A single Google search, for example, uses the equivalent of powering a 60W lightbulb for 17 seconds and there are approximately 3.5 billion searches made daily. In comparison, Goldman Sachs estimates that a query on ChatGPT draws nearly 10 times the electricity needed to process a basic Google search. As a consequence of this rise in power use, the International Energy Agency expects data centres to account for 945 terawatt-hours per year by 2030 – more than Japan’s current annual electricity consumption.
Insuring the renewables
For a world undergoing an energy transition, this increasing power demand cannot simply be delivered by existing electricity generation. “Given the growth in demand for energy and the need for countries to meet their net zero commitments, much of the electricity used by data centres is expected to come from renewable projects,” says Hiscox’s Louis Cozon – Line Underwriter, Power and Renewables. In the UK, for example, global data centre provider Telehouse recently agreed a 10-year deal with RWE to power one of its European data centre hubs with wind energy harvested from the London Array offshore wind farm in the Thames Estuary. While in the US, S&P Global reports that data centres have contracted to buy at least 50 GW of clean energy annually from a mixture of solar, wind and other solutions such as nuclear – meeting about half of their energy requirements. “But the renewable projects needed to meet this power demand will only go ahead,” Cozon cautions “if they are supported by the insurance industry. The market needs to continue to sustainably provide products protecting power facilities and their investors from a wide range of risks – including transportation and construction, right through to project start-up and operational phases.”
These are risks, however, that the London insurance market is accustomed to, Cozon adds: “While the insurance market is currently well-positioned to support the rising demand for renewable energy, this momentum brings with it a set of complex underwriting challenges. We’re navigating an unprecedented pace of technological advancement alongside increasingly demanding environmental conditions – both of which complicate the task of accurately assessing risk. This complexity can arise in various forms, for example: deploying established technologies like solar in unfamiliar regions with unique environmental factors; evaluating the latest iteration of rapidly evolving technology, as seen in the wind sector; or even considering emerging concepts such as modular nuclear reactors, which are largely prototypical.
“It’s important that the cover is tailored to our clients’ needs and at terms that are sustainable for the market in the long term. Getting that level of understanding is why we’ve added risk engineering expertise to our team here at Hiscox, which also means we can underwrite the prototypical renewables risks that other insurers might be less comfortable with – a key requirement given the fast pace of technological advancement.”
Protecting data centres
Keeping the data centres powered up is one area where insurance is playing a role, but another requirement is in protecting the facilities themselves from property and business interruption risks. “Fire safety is an obvious component of data centre risk management as a consequence of the heat data centres can create and the use of lithium-ion batteries as power back-up systems,” says James Tanner, Major Property Line Underwriter for Hiscox. Fires in data centres have occurred around the world in recent years, including one in South Korea’s Pangyo district in 2022 which was reported to have been "worsened" by a design flaw where the batteries were not physically separated from the data centre. "But fire isn't the only risk that could put a data centre out of action. Other natural hazards like flooding, earthquakes, hail and storms are all a consideration, as well as man-made threats ranging from cyber incidents to theft and sabotage,” says Tanner.
The insurance opportunity
The challenge from an underwriter's perspective, Tanner adds, is the relative immaturity of the risk. "For expanding risks like data centres, there is little historical claims data available for the bigger, more complex operations, particularly when related to risks like business interruption which will form one of the biggest components of any potential claim given so many businesses rely on receiving an uninterrupted service from their data centre supplier.”
It’s one reason why risk selection is so critical, says Tanner: “We spend time carefully looking at how a data centre is operated and managed, and will differentiate between operations based on how they manage their risk. Take the threat of fire, where the problem isn’t necessarily the batteries themselves, with lithium-ion technology being a well-known technology, but more around where the battery rooms are physically located and how they are connected that can cause catastrophic fire damage. Understanding that detail is critical.”
London will play its part
Despite these challenges, or perhaps because of them, data centres represent the type of critical infrastructure that the London insurance market is actively looking to underwrite. “Many of the existing data centre property risks have been met in local retail insurance markets, but London will play a major role when looking at data centres operating in more challenging environments, where natural catastrophe risks are more prevalent,” concludes Tanner. “With the expected growth around the world, data centres provide an exciting insurance opportunity, whether it’s for the power generating renewables that sit behind them or in the protection of the facilities themselves.”