Data centers could be the next big market for catastrophe bonds

The rapid buildout of hyperscale data centers is creating tens of billions of dollars of concentrated physical assets — and an insurance challenge that traditional markets may struggle to handle on their own.

The soaring value of data center assets, which are increasingly concentrated in regions exposed to hurricanes, floods and other natural disasters, has underscored the need for insurance coverage.

CAT bonds, or catastrophe bonds, could provide insurers and reinsurers with a way to offload some of that risk to capital market investors over the coming months, industry experts told CNBC, although the market is only just starting to take shape.

“The honest answer is that not a single dollar of data center risk has come to the cat bond market yet,” said Ethan Powell, principal and chief investment officer of Brookmont Capital Management, a Texas-based firm with more than $1 billion in assets under management.

“What’s happening right now is one layer upstream, through quota shares, sidecars and new reinsurance facilities, as reinsurers wrestle with how to price data center risk and find enough capacity to cover it.”

CAT bonds may become part of the solution, Powell said, particularly given that a single hyperscale campus could carry between $20 billion and $30 billion of insurable value, compared with roughly $66 billion outstanding across the entire CAT bond market.

“One campus can carry insured value equal to roughly a third of every catastrophe bond in existence. You cannot solve that with the traditional market alone. The arithmetic doesn’t work, and that’s why this ultimately ends up in the capital markets,” Powell told CNBC by email.

First created in the 1990s, CAT bonds refer to a type of financial instrument designed to raise money for insurers in the event of a natural disaster, such as a hurricane or earthquake.

These insurance-linked securities (ILS) are essentially a way for insurers or reinsurers to offload the risk of potentially large losses from extreme events to investors. This, in turn, provides insurers with access to funding, helping them to pay claims in the event of a catastrophe.

In the AI boom, the most likely entry point for CAT bonds would be a traditional property catastrophe tranche covering risks the ILS market already knows how to model, including hurricanes and earthquakes, Powell said.

This is particularly relevant, he continued, as more data centers are built in places like Texas and Arizona, shifting potential exposure from coastal hurricanes toward severe weather risks like tornadoes and hail.

“The challenge is that some of the biggest data center exposures, including fire, water damage, power outages and business interruption, are harder for the cat bond market to price today,” Powell said.

“As those risks become better modeled and structures become more standardized, I would expect the first dedicated data center cat bond deal within the next 12 to 18 months.”

CAT bonds are said to offer highly attractive equity-like returns, low volatility and low correlation to broader financial markets. But investors do face the risk of losing some or all of their initial investment when covered catastrophe triggers are met.

The broader CAT bond market is firmly on track for another record year, with issuance reaching $18.9 billion so far in 2026 as first-time buyers flock to what was long considered a relatively niche corner of the insurance market.

“Insurers and reinsurers recognise the benefits of the catastrophe bond structure, in bringing them diversifying capacity sources in a structured and multi-year format,” said Steve Evans, owner and editor-in-chief at specialist data provider Artemis.bm.

“In addition, the well-capitalised nature of the global reinsurance and insurance-linked securities market means that pricing of reinsurance and cat bond spreads have softened, making buyer conditions even more favourable.”

There appears to be “no signs of investor interest waning,” Evans said, even as spreads move closer to historical averages.

Alongside natural disasters, lenders to data centers may also turn to the CAT bond market to offload risks associated with sabotage, war and cyberattacks, according to Hanni Ali, founder and CEO of Radix ILS, a Bermuda-based insurance-linked securities platform.

“I think the interesting thing with data center risk is that we’ve got an accumulation of physical infrastructure assets — and I’d caution that certainly with the ongoing war in the Middle East, we’ve also got to recognize that this represents critical infrastructure,” Ali told CNBC by video call.

“So, reinsuring critical infrastructure into capital markets is clearly a sensible thing to be doing, but that extends beyond pure elemental risk,” he added.

The CAT bond market still has a long way to go to be able to support the significant insurance limit required by the rapidly growing data center development, Evans said.

“What perils get covered and in what formats is yet to become clear,” he continued. “But these high-value digital infrastructure builds are going to carry meaningful natural catastrophe and severe weather exposure, which may result in a role for ILS structures in a number of forms, and for the peak catastrophic exposures catastrophe bonds are likely to derive some exposure from data centers over time.”