A panoramic view of the Google Midlothian data center in Midlothian, Texas, on November 14, 2025.
Ron Jenkins Getty Images
The rapid construction of hyperscale data centers is creating tens of billions of dollars of concentrated physical assets, creating insurance challenges that traditional markets may struggle to address on their own.
The soaring value of data center assets and their increasing concentration in areas exposed to hurricanes, floods, and other natural disasters emphasize the need for insurance coverage.
Industry experts told CNBC that while the market is just beginning to take shape, catastrophe bonds could provide insurance and reinsurance companies with a way to offload some of their risk to capital market investors over the coming months.
“The honest answer is that data center risk is not a dollar in the cat bond market yet,” said Ethan Powell, principal and chief investment officer at Texas-based Brookmont Capital Management, which manages more than $1 billion in assets.
“What’s happening right now is happening upstream with quota shares, sidecars and new reinsurance facilities as reinsurers struggle with how to price data center risk and find enough capacity to cover it.”
I expect the first data center-specific cat bond transactions to occur within the next 12 to 18 months.
Ethan Powell
Principal and CIO of Brookmont Capital Management
Powell said CAT bonds could be part of the solution, especially considering that a single super-large campus could have an insured value of $20 billion to $30 billion, compared to about $66 billion outstanding in the overall CAT bond market.
“One campus can have an insurance value that’s about a third of all the catastrophe bonds in existence. You can’t just solve that in traditional markets. The arithmetic doesn’t work. That’s why it ends up in the capital markets,” Powell told CNBC in an email.
What is a CAT bond?
First created in the 1990s, CAT bonds refer to a type of financial product designed to raise funds for insurance companies in the event of a natural disaster such as a hurricane or earthquake.
These insurance-linked securities (ILS) are essentially a way for insurance or reinsurance companies to pass on the risk of potentially large losses from extreme events to investors. This gives insurance companies access to funds and helps pay out claims in the event of a catastrophe.
Powell said that in the AI boom, the most likely entry point for CAT bonds would be traditional real estate catastrophe tranches that cover risks that the ILS market already knows how to model, such as hurricanes and earthquakes.
This is especially important, he continued, as more data centers are being built in states such as Texas and Arizona, and the potential risk shifts from coastal hurricanes to severe weather risks such as tornadoes and hail.
“The challenge is that some of the largest exposures in data centers, such as fire, water damage, power outages and business interruption, are difficult to price in today’s cat bond market,” Powell said.
“As these risks are better modeled and structures become more standardized, we expect to see the first data center-specific cat bond transactions within the next 12 to 18 months.”
CAT bonds are said to offer highly attractive stock-like returns, low volatility and low correlation with broader financial markets. However, investors face the risk of losing some or all of their initial investment if a covered catastrophic trigger occurs.
The broader CAT bond market is firmly on track for another record year, reaching $18.9 billion in issuance through 2026 as first-time buyers flood what was long considered a relatively niche corner of the insurance market.
This aerial photo shows residents walking through floodwaters to cross a road near Maputo on January 20, 2026.
Emidio Jozin | AFP | Getty Images
Steve Evans, owner and editor-in-chief of specialist data provider Artemis.bm, said: “Insurers and reinsurers are recognizing the benefits of catastrophe bond structures in providing source diversification in a structured, multi-year format.”
“Furthermore, the well-capitalized global reinsurance and insurance-related securities markets mean that the pricing of reinsurance and cat bond spreads has eased, making conditions more favorable for buyers.”
Evans said that despite spreads approaching historical averages, there appears to be “no sign of investor interest waning.”
hurdles to overcome
In addition to natural disasters, data center lenders may also look to the CAT bond market to mitigate risks related to sabotage, war, and cyberattacks, according to Hanni Ali, founder and CEO of Radix ILS, a Bermuda-based insurance-related securities platform.
“I think what’s interesting about data center risks is the accumulation of physical infrastructure assets. I would caution you that there is certainly a war going on in the Middle East and you have to also recognize that this is critical infrastructure,” Ali told CNBC on a video call.
“So reinsuring critical infrastructure into the capital markets is clearly a prudent move, but it goes beyond pure factor risk,” he added.
Evans said there is still a long way to go before the CAT bond market can support the large insurance limits needed for rapidly growing data center developments.
“It is not yet clear what risks will be covered and in what form,” he continued. “However, the construction of these high-value digital infrastructures will involve exposure to significant natural disasters and severe weather, and as a result, ILS structures may play a role in a number of ways, and disaster bonds may extract some degree of exposure from data centers over time to prepare for the worst exposure.”
