(Bloomberg) -- A form of self-insurance often associated with mining, oil and other environmentally risky sectors is quietly transforming the market for physical-risk coverage, thanks to the rise of mega AI data centers. Toyota Unveils $2,500 Go-Kart in Bid to Grow Motorsports Fans PlayStation Ditched Hideo Kojima's 'Physint' on Budget Concerns, Missed Deadlines Oracle to Spend an Additional $700 Million on More Job Cuts Saudi Shuts Oil Pipeline That Bypasses Hormuz After Attacks OpenAI Is Open to Slowing Cutting-Edge AI, CEO Sam Altman Tells Staff Captives — whereby firms sidestep traditional insurers and instead set up their own in-house insurance - is emerging as a go-to coverage model for the infrastructure around artificial intelligence, according to Michael Serricchio, US and Canada captive solutions leader at Marsh, the world's biggest insurance broker. "What you're going to see is an explosive growth in the use of captives to take on the portfolio risks for data centers," Serricchio said in an interview.
"Inadvertently, some of the risk for build-outs, construction, surety, property and liability will end up in their captive." He declined to provide details of individual companies, noting the sensitivity associated with such deals. The development represents a quiet but meaningful realignment of the global risk and insurance landscape. The sheer size and scale of AI data centers often makes them bigger than anything traditional insurers have had to take on before.
At the same time, many such facilities are being built in areas where cheap land often comes with weather risks, such as tornadoes, floods and drought. Oil and gas firms were instrumental in pioneering captives five decades ago, to cover hard-to-insure environmental catastrophes like oil spills. Captives can now be arranged to cover risks spanning everything from natural catastrophes, to liability and workers' compensation.
For companies using captives, part of the appeal lies in their ability to reinvest premiums, rather than having to treat such payments to a third-party insurer as a form of sunk cost. AM Best, an insurance-focused credit rating firm, says the roughly 150 US captives it rates generated more than $8 billion in savings over the past five years. The ability to turn insurance from "a pure cost center into a potential profit center" is the corporate world's "best kept financial secret," according to Cottingham & Butler, a US insurance broker.
There are currently more than 6,000 captives globally, writing about $240 billion in premiums, which is close to a fifth more than the amount underwritten two years ago, according to data compiled by Captive Review, a trade publication. "It's been a steady and almost uninterrupted increase," said Joe Peiser, chief executive of risk capital at insurance broker Aon Plc. "Driving it is loss severity — when premiums go up, clients look for ways to manage losses by taking the bottom layer" of the risk.
Marsh says it manages about 1,900 captives for corporate clients, collectively writing about $79 billion of premium, of which only $11.5 billion has been used to buy reinsurance for major risks. "We have a lot of clients saying to us, 'I've paid property insurance premiums for 10 years, I've never made a claim, and I don't want to do that anymore'," said Serricchio of Marsh. Hyperscalers are also exploring other forms of risk-retention that aren't captives, but that mirror their purpose.
Extract — continue reading at the source.
