As data becomes an even bigger part of our day-to-day lives, the number of connected devices worldwide is booming. Between 2020 and 2030 connected devices– including smart phones, fitness trackers and digital home devices– are forecast to nearly triple from 9.7 billion to more than 29 billion.1 The need to support, transmit and store information from these technologies has created a fast-growing market for data center construction, in order to processes and host device data.
As financial institutions and private equity investors look to finance future data center projects –like upgrading existing infrastructure or investing in new construction – there are a variety of risk factors that lenders and investors should evaluate, said Ryan Murphy, a London-based senior underwriter on The Hartford's Credit and Political Risk Insurance (CPRI) team. “A number of issues can have adverse effects on data center project finance transactions,” Murphy explained. Those factors include legal and regulatory environments, climate change, digital transformation, inflationary pressures, and supply chain issues –all of which continue to evolve.”
How Does Credit Insurance Play Into the Success of Your Business?
As lending institutions navigate their exposure to these potential financial risks, credit insurance is helping financial institutions de-risk some of their larger exposures to the sector, while enabling them to support these transactions with larger commitments.
Credit insurance provides coverage for non-payment of project-related debt. “Banks looking to upsize their participation on a data center transaction can use an insurer's capacity through credit insurance to lend more money," Murphy said. “They might also be able to get capital relief from financial regulators, which require that banks hold a certain amount of assets in reserve against their loan portfolio.”
Typically, data centers are owned by digital infrastructure specialists or technology-focused private equity funds. Often, technology companies like Google or Facebook occupy an entire data center or multiple companies will lease a portion of the space for additional network capacity and infrastructure. To date, the majority of data center project financings have been based in developed countries, such as the U.S. or in Europe. This is driven by strong consumer demand and stable legal and regulatory environments. In fact, the U.S. houses more than 2,700 data centers nationwide and accounts for roughly 40% of global data center usage.4,5
Understanding Data Center Investment Risks
As digitally connected economies take root in developing countries, demand for data centers in locations beyond the U.S. and Europe – such as Latin America – are growing. Banks and insurers should account for political risk in developing regions.
“A new government administration could enforce new taxes or halt the development of certain projects," Murphy said. “Political risk is a key consideration in our portfolio.”
Another issue driving the demand for upgrades, new construction and additional financing for data centers is climate related.
“There is lot of pressure from regulators, consumers and investors for energy efficiency and the use of renewable energy sources,” Murphy said. That's because data centers utilize a significant amount of energy to operate. In fact, a single data center can consume the equivalent energy of 50,000 homes and cloud-based storage is estimated to have a greater carbon footprint than the airline industry.6
“We're more cautious about hosting artificial intelligence in the data centers we’re looking at from an underwriting perspective,” said Murphy. “And at the same time, we’re currently working out how we can support these types of pioneering transactions going forward.”
The Hartford’s team utilizes their exclusive research hub called, the Global Specialty Insights Center, which is led by a senior economist. This data enables our underwriters and brokers to help clients understand the geopolitical and economic trends impacting large scale projects, including data centers, digital infrastructure, green energy, and renewable (wind and solar) projects.
Visit the CPRI website to explore more of our capabilities.
1 “Number of Internet of Things (Iot) Connected Devices Worldwide From 2019 to 2021, With Forecasts From 2022 to 2030,” Statista, November 22, 2022
2 “Investing in the Rising Data Center Economy”, McKinsey & Company January 17, 2023
3 “Global Data Center Construction Market Size, Share & Industry Trends Analysis Report By Tier Type, By End-Use, By Type, By Regional Outlook and Forecast, 2022 – 2028,” Report Linker, March 2023
4 “Number of Data Centers Worldwide in 2022, by Country,” Statista, September 2022
5 “Global Data Center Construction Market Size, Share & Industry Trends Analysis Report By Tier Type, By End-Use, By Type, By Regional Outlook and Forecast, 2022 – 2028,” Report Linker, March 2023
6 “The Staggering Ecological Impacts of Computation and the Cloud,” The MIT Press Reader, February 14, 2022
7 “Green Cloud and Green Data Centres, European Commission, accessed June 2023
8 “Tougher Reporting Mandates Ahead for Data Centers,” Data Center Knowledge, February 10, 2023
This article provides general information, and should not be construed as specific legal, HR, financial, insurance, tax or accounting advice. As with all matters of a legal or human resources nature, you should consult with your own legal counsel and human resources professionals. The Hartford shall not be liable for any direct, indirect, special, consequential, incidental, punitive or exemplary damages in connection with the use by you or anyone of the information provided herein.
Certain coverages vary by state and may not be available to all businesses. All Hartford coverages and services described on this page may be offered by one or more of the property and casualty insurance company subsidiaries of The Hartford Financial Services Group, Inc. In Texas and California, the insurance is underwritten by Hartford Accident and Indemnity Company, Hartford Fire Insurance Company, Hartford Casualty Insurance Company, Hartford Lloyd’s Insurance Company, Hartford Insurance Company of the Midwest, Navigators Insurance Company, Navigators Specialty Insurance Company, Maxum Casualty Insurance Company, Maxum Indemnity Company, Trumbull Insurance Company, Twin City Fire Insurance Company, Hartford Underwriters Insurance Company, Property and Casualty Insurance Company of Hartford and Sentinel Insurance Company, Ltd.
Links from this site to an external site, unaffiliated with The Hartford, may be provided for users' convenience only. The Hartford does not control or review these sites nor does the provision of any link imply an endorsement or association of such non-Hartford sites. The Hartford is not responsible for and makes no representation or warranty regarding the contents, completeness or accuracy or security of any materials on such sites. If you decide to access such non-Hartford sites, you do so at your own risk.
The Hartford Financial Services Group, Inc., (NYSE: HIG) operates through its subsidiaries, including the underwriting company Hartford Fire insurance Company, under the brand name, The Hartford,® and is headquartered in Hartford, CT. For additional details, please read The Hartford’s legal notice at https://www.thehartford.com.
