The race to build artificial intelligence infrastructure is creating huge new risks that could threaten funding for the data centers driving the artificial intelligence boom, the researchers say. Aon CEO Greg Case.
In an interview with CNBC on Wednesday, Case warned that concentrating billions of dollars of equipment and computing power in a small number of locations could make it harder to insure some projects and impact developers seeking funding.
“When you create insurance and build insurance on top of it, you create concentration risks in a way that makes it more difficult to insure,” Case said.
“If it becomes more difficult to get insurance, that means a complete change in the funding structure. You won’t have access to the bond market,” he said.
Case said the potential financial risks from business interruption are staggering.
“Data centers are literally measuring millions of dollars in business interruption every minute,” he told CNBC.
The warning comes as technology companies accelerate spending on data centers, power generation and other infrastructure needed to support AI. These investments are creating opportunities for insurance companies, brokers, and business risk consultants. There are also questions about whether traditional insurance companies have enough capacity to absorb the risks.
Aon reported a record pipeline of data center projects in its third-quarter results, driving 7% organic revenue growth in its commercial risk business in the quarter. Adjusted earnings per share increased 10% to $3.36, and adjusted operating margin expanded 70 basis points to 27%. One basis point equals 0.01%, or 1/100th of 1%.
To meet growing demand, including a $10 billion data center facility and a $2.5 billion energy facility, the company has developed specialized insurance facilities, or capacity pools, that cover specific industries and risks.
According to Case, managing risk begins long before a policy is created. Aon said it is working with developers to design and sit the facility, reduce potential business interruption, and develop insurance coverage that can assist with financing.
“These are engineering conversations about understanding risk,” Case said.
A $17 billion bet on a risky world
The growing demand for advanced risk management is also at the heart of Aon’s $17 billion acquisition plan for USI Insurance Services, which is expected to close in the fourth quarter.
The partnership will combine USI and Aon’s existing businesses and Aon’s 2024 acquisition of NFP, creating an approximately $6.5 billion mid-market platform.
Case said small and medium-sized businesses face many of the same increasingly complex risks as multinational corporations, but often lack access to the same analysis, expertise and insurance solutions.
“Our mid-market customers face the exact same challenges and the exact same risks every day, and they deserve the content, insight and capabilities of the world’s largest companies,” Case said.
Most industry participants and experts predict that AI will make insurance brokerage and consulting more efficient. Asked why Aon is investing billions of dollars in acquisitions rather than just focusing on expanding its technology capabilities, Case said the two are not mutually exclusive.
“It’s a matter of talent and technology,” he said. “If you get both right, you can build relationships that matter to your clients.”
Aon expects the combination of USI to result in annual benefits of $395 million, including $280 million in cost savings and $115 million in revenue synergies.
The acquisition will be financed with debt, and the company expects to prioritize deleveraging over the next two years.
AI cyber insurance risks
AI is creating opportunities for insurers to better understand their vulnerabilities, even as it poses new threats that can cause widespread financial losses.
On October 21, researchers revealed two critical vulnerabilities in PHP, a programming language used by about 70% of websites. This flaw could allow a hacker to remotely execute malicious code on a vulnerable server without authentication. AI helps cybersecurity companies California and Google Wiz and OpenAI.
Asked whether cyber risks are growing faster than insurance companies can keep up, Case said the industry needs to expand beyond its traditional capital base to meet growing demand.
“We have to keep up. We have to keep evolving,” he said.
Case estimates that the global insurance industry currently has approximately $4.5 trillion in capital. He believes that volume will need to double or triple to meet growing needs across cyber, AI, data centers, and other emerging risks.
“I’d say 5 trillion to 10 trillion to 15 trillion,” Case said, outlining his vision for expanding the industry’s capacity, clarifying his remarks during the company’s second-quarter earnings call.
His strategy includes leveraging institutional investors, pension funds, sovereign wealth funds and wealthy individuals to help finance risks traditionally taken by insurance and reinsurance companies. Case estimates that these sources represent a potential capital pool of approximately $250 trillion, some of which could significantly expand the market.
Aon is increasingly positioning itself not just as a broker between companies and existing insurance companies, but as an intermediary that helps create new pools of capital to absorb complex risks.
“We’re not only market takers and market optimizers for our clients, but we’re also market makers who drive certain types of risks and create new markets to address those risks,” Case said.
This creates opportunities for alternative asset managers and individual investors seeking returns from insurance-related investments, but investors must be able to assess the potential for large correlated losses.
Case said a key element is the ability to quantify exposure accurately enough to give investors confidence to deploy capital.
commercial insurance prices
While corporate risks have become more complex, some commercial insurance prices have fallen, and businesses are beginning to feel some relief after years of rising premiums.
However, Mr Case cautioned that this would not mean lower premiums would last for a long time.
“Some people are confusing it with a permanent soft market, but that’s not the case at all,” he said.
He said some business customers are using lower insurance prices as an opportunity to buy more coverage rather than simply cutting back on spending.
“Literally, once we understand our exposure, we have some clients who completely restructure their programs and buy more because they need more coverage, even if the unit price is lower,” Case said.
This dynamic has helped Aon maintain growth despite softening pricing in the commercial insurance and reinsurance markets.
