As generative AI and Cloud computing services rapidly expand, they are also driving growth along an entire supporting infrastructure chain for these technologies. This rising demand is consequently fueling a surge in data center construction globally.

Sourcing power, key equipment and skilled construction labor are key priorities for data center developers. However, limitations in availability of suitable land and power supplies, along with construction delays, can hinder progress. In the near-term, developers and operators are striving to meet sustainability commitments, alongside managing multiple external and project-specific risks, all while trying to serve the high energy demands of data centers.

Engaging risk advisory partners early on is therefore crucial to managing complex risks through each phase of the data center project life cycle. It also supports cost-effective risk management and risk transfer programs.

Innovation is key to navigating the insurance market for data center projects. Due to insurers’ evolving knowledge and experience, data center developers and operators should try to anticipate the complex risks their projects will face during all phases. This preparation will be essential as claims continue to evolve for these projects and large losses relating to data centers increase in frequency.

Key risks in data center design, development and construction

Power availability: Power is a fundamental consideration for data center operators conducting site selection and traditional power is still integral to running data centers. Operators have begun to canvas countries and utility providers across regions in search of large tracts of untapped, ready-to-source power, as well as markets with available renewable and sustainable options, such as solar, wind, hydroelectric and micronuclear.

Many utility providers are suggesting wait times of several years for sizable power to be delivered to their developments. The challenge of available power has led operators to invest in new power technologies, such as battery storage facilities and geothermal power.

Land availability: As cloud demand from AI increases, operators are required to build larger developments to satisfy hyperscale users. In addition to demanding more power, owners must find larger acreages to lock in a land price that protects exposure to speculative demand once a major market development is announced. This approach also helps operators control the longer-term phasing of the development. However, securing large parcels of land in many metropolitan areas may be difficult (Global Data Center Trends 2024, CBRE).

Supply chain disruptions: Data center developers are experiencing extended long lead times for critical equipment such as generators, switchgear, power distribution units (PDUs) and cooling systems. Global shortages in semiconductors and electrical components are still impacting timelines.

Additionally, uncertainty regarding tariffs is further complicating procurement and planning processes, as potential changes in trade policies could affect the cost and availability of these essential components.

Growing use of sustainable materials: Data center owners are increasingly trying to use low-carbon materials to decarbonize both the centers and construction operations. This approach includes concrete that permanently traps carbon dioxide and steel, which is powered using renewable energy. Microsoft is now building its first data centers made with structural mass timber to slash the use of steel and concrete, which are among the most significant sources of carbon emissions.

Fire risks: Fires in data centers are typically caused by a breakdown of machinery, plant or equipment. A fire that spreads quickly can result in significant financial losses and business interruption. While the structures for data centers often have concrete frames that are not significantly impacted by fires, it’s the high-value equipment that drives losses – from cooling technology to high-end computer servers or graphic card components.

Six strategies to manage data center risks effectively

1. Start early: Engage your insurance risk advisor early in project development to receive assistance in risk identification and mitigation strategies with the help of available data while mapping estimated cost projections.
2. Conduct pre-loss preparations: Nominating strong loss adjusting partners to ensure that the right experts are on board for construction projects is particularly important for data centers. Using loss simulations through the project cycle also helps to improve the level of preparedness of the project team when an incident, such as a fire, occurs.
3. Use a holistic approach: Work with a broker that has the team, knowledge, technology, global presence and market relationships to manage data center risk throughout the total project life cycle – from construction to operations and decommissioning.
4. Understand stakeholder risks: Risk and insurance advisors can engage in contract negotiations with architects, contractors and lenders to allocate and address risks properly. They can also provide guidance around the business challenges of power consumption from utility producers and independent power producers involved with projects. Because partnerships on these projects are complex and diverse, the division of risk needs to be clearly understood.
5. Consider non-traditional insurance solutions: Alternative risk transfer products like captives and parametric insurance are effective solutions for data center developers and owners to use and supplement traditional insurance coverages.
6. Use climate risk analysis: This review will help developers access an informed view of how the changing climate will affect natural catastrophe-related risks that the data center is exposed to over the next 10 to 15 years.