Data centres: innovation, opportunity and risk

The insurance market has played an important role in enabling this growth. Data centres have become an attractive construction class for insurers and investors alike: relatively standardised, highly scalable, and to date, associated with favourable loss ratios. These qualities have driven rapid global expansion. However, this opportunity is accompanied by increasingly complex and interconnected risks.

Scalable, but complex

Data centre investment can be unforgiving. Even minor construction delays or brief outages can quickly escalate into significant financial loss. Successful delivery depends on tightly sequenced construction followed by highly reliable operations.

In practice, achieving this is challenging. Projects involve complex contractor networks, key supplier dependency, emerging technologies, and equipment that can quickly become obsolete. Increasing server density drives higher power consumption and cooling requirements, amplifying both design and construction risk.

At the same time, labour and supply markets are struggling to keep pace. Shortages of specialised manufacturers, experienced suppliers, and skilled trades are increasing reliance on constrained supply chains, heightening execution and disruption risk.

Key risk drivers in data centre construction

Claims professionals play a critical role in navigating this evolving landscape - both through pragmatic claims handling and by capturing insights to inform underwriting and future decision-making. Several interconnected risk areas are likely to drive future construction claim frequency and severity. As a Claims community, we must be particularly alive to the following.

Consistent, reliable and resilient power supply is essential

AI-driven technologies are significantly increasing power demand. In many regions, grid infrastructure lacks the capacity to support large-scale data centre expansion. While upgrades are underway, they are expensive, complex, and time-consuming. Renewable power sources are unlikely to be able to meet the colossal power needs of hyperscale data centres.

Developers are increasingly turning to alternative on-site power solutions such as combustion turbines, fuel cells, power purchase agreements, and, in some cases, nuclear-linked generation. Temporary solutions, including diesel generators, are also being used. These approaches introduce new risks. First-of-their-kind power systems increase the likelihood of faults, while greater reliance on on-site power generation heightens business interruption exposure. Longer equipment lead times, rising supply chain costs and inflation, all materially increase overall exposure.

Growing power needs require complex cooling solutions

Cooling is an increasingly critical yet underestimated risk. Rising server densities are accelerating the adoption of liquid cooling systems, which provide efficiency benefits but introduce complex mechanical risks. Open loop cooling solutions require significant water consumption to meet the constant cooling demand making achieving sustainability goals difficult and potentially alienating residents and local businesses living with an already constrained water supply. Closed loop systems offer greater efficiency and present opportunities for innovation, particularly where bespoke solutions can be adapted alongside technological advancements.

All cooling systems are vulnerable to corrosion, material incompatibility, and installation defects. Given their proximity to sensitive equipment, even minor failures can result in significant damage, delaying completion or disrupting live operations. Incorporating redundancy in design, robust protection systems, and effective contingency planning can materially reduce overall risk.

Sequenced construction exacerbates CAR risk

Sequenced construction is widely used in data centre projects due to technical and commercial pressures. However, it introduces additional risk. Critical components may be installed before air management systems are fully operational, increasing exposure to contamination and damage. Frequent handoffs between contractors, often working in confined and time-pressured environments, further elevates this risk. Where defects occur, access constraints - particularly in modular or densely configured builds - can require extensive strip-out, increasing both cost and delay. In operational facilities, enhanced security protocols may further complicate repair works, particularly where sensitive data or intellectual property is involved.

The rising cost of delay: BI and DSU exposure

Business Interruption (BI) and Delay in Start-Up (DSU) exposures remain among the most challenging risks for insurers. Global supply chain disruption, driven by geopolitical instability, continues to impact the availability of labour, materials, and specialist equipment. Following a loss, expediting replacement components and expertise at short notice is increasingly difficult and costly, extending recovery timelines and inflating claim values.

Data centre projects are highly interdependent, particularly in ensuring a secure and continuous power supply. Many developments rely on newly constructed or upgraded energy infrastructure, introducing contingent risk. The scope of power purchase agreements and end customer contracts need to be fully understood before BI and DSU cover can be contemplated.

Compounded supply chain risk

To mitigate delay, contractors may procure and store specialist equipment ahead of installation. Risk allocation in construction contracts increasingly favours suppliers, pushing responsibility—and cost—onto project owners and expanding CAR exposure for insurers. Without robust storage and handling standards, equipment is exposed to water ingress, contamination, and deterioration. This can lead to damage vs defect disputes, particularly where warranties are withheld by manufacturers. Claims professionals will come under pressure to resolve highly technical disputes quickly. Rapid technological evolution further complicates claims, as obsolescence may make like-for-like replacement difficult or impossible.

Claims complexity and aggregation

Confidentiality obligations, lack of contractual transparency, and complex multi policy programmes increase the risk of delayed notifications, inadequate reserving and coverage disputes. Operators often maintain overlapping construction, property, cyber, marine, renewable, liability, and technology policies - making coordination critical.

Aggregation risk is also increasing. Data centres are clustered in regions offering power availability, tax incentives or available land. Exposure to hail, tornadoes, windstorms, and flooding raises the spectre of systemic losses, in the absence of meaningful historical claims data.

Mitigating risk and looking forward

While the long-term impact of the data centre boom is not yet fully understood, claims handling in this sector will be distinct. Claims professionals must restore critical digital infrastructure under significant time pressure, navigating complex technical, contractual, and coverage issues.

Lessons can be drawn from modular construction and renewable energy sectors, where standardised designs and reliance on specialised supply chains have presented similar challenges. In data centres, claim quantum is likely to be driven as much by delay and disruption as by physical damage.

Key takeaways

1. Collaboration is key

Data centres represent a rapidly evolving and complex risk landscape. Limited historical losses should not be mistaken for low risk. Close collaboration between underwriting, claims, and risk engineering - supported by proactive engagement with brokers and insureds - is essential to manage exposure and keep pace with innovation.

Effective claims response is critical. The following measures support this:

• Pre-agreed loss adjuster panels with relevant expertise and pre-signed NDAs
• Pre-loss understanding of contracts, stakeholders, and key exposures
• Advance knowledge of system redundancies and critical paths to enable faster, confident decision-making
• Clearly defined claims protocols, with structured communication and escalation routes to manage expectations

2. Claims-led insight is critical

Given the constantly evolving subject matter, claims professionals are uniquely positioned to identify systemic risks, repetitive defects, and emerging trends. Sharing these insights is essential to support underwriting, refine pricing, and better understand how policy coverage - particularly in relation to mitigating supply chain disruption and obsolescence—is being utilised.

3. The boom is just getting started

Project values are rising rapidly, some reaching multi-billion-dollar levels. Traditional insurance capacity may become insufficient, driving alternative structures such as consortia and capital market participation. This shift may ultimately place insurers in a stronger position to shape outcomes - using capacity as leverage to influence design standards, risk mitigation, and operational resilience.

Insurers that invest early in understanding these dynamics will be best positioned to support the sector’s continued growth and deliver resilient, innovative insurance solutions.

References

• https://www.datacenterknowledge.com
• Inside the power-hungry data centres taking over Britain
• Ed Miliband says climate impact of data centres is uncertain - BBC News
• Honey, I shrunk the data centres: Is small the new big? - BBC News