The rapid expansion of hyperscale data centers amid the AI boom is creating tens of billions of dollars in concentrated physical assets, posing a growing challenge for the insurance industry. Experts say traditional insurers may struggle to absorb that scale of risk on their own, especially as more facilities are clustered in areas exposed to hurricanes, floods and other natural disasters.
Industry specialists told CNBC that CAT bonds, or catastrophe bonds, could become one way for insurers and reinsurers to transfer part of that risk to capital market investors. For now, however, the market for data-center-related CAT bonds is only beginning to take shape.
According to Ethan Powell, principal and chief investment officer of Brookmont Capital Management, “not a single dollar” of data center risk has yet reached the CAT bond market. At present, he said, activity is happening one layer upstream through quota shares, sidecars and new reinsurance facilities, as reinsurers work out how to price data center risk and secure enough capacity to cover it.
Powell said he expects the first dedicated data center CAT bond deal to emerge within the next 12 to 18 months. He noted 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. In effect, one major campus could represent insured value equal to about a third of the current catastrophe bond market.
What CAT bonds do
First introduced in the 1990s, CAT bonds are financial instruments designed to help insurers raise funds after natural disasters such as hurricanes or earthquakes. As insurance-linked securities, or ILS, they allow insurers and reinsurers to shift the risk of potentially large losses from extreme events to investors, while giving carriers access to funding to pay claims when catastrophe strikes.
Powell said the most likely starting point for CAT bonds in the AI era would be a traditional property catastrophe tranche covering risks the ILS market already knows how to model, including hurricanes and earthquakes. That matters increasingly as more data centers are built in places such as Texas and Arizona, moving exposure away from coastal hurricane risk and toward severe weather threats like tornadoes and hail.
At the same time, some of the biggest data center exposures — including fire, water damage, power outages and business interruption — remain harder for the CAT bond market to model and price. Powell said that as those risks become better understood and deal structures become more standardized, a dedicated transaction is likely to become feasible within the next 12 to 18 months.
CAT bonds are often seen as offering attractive equity-like returns, relatively low volatility and limited correlation with broader financial markets. But investors also face the possibility of losing part or all of their initial investment if a covered catastrophe trigger is met.
More broadly, the CAT bond market is on track for another record year in 2026, with issuance reaching $18.9 billion so far as first-time buyers continue to enter what was once a niche corner of the insurance market.
Steve Evans, owner and editor-in-chief at specialist data provider Artemis.bm, said insurers and reinsurers recognize the advantages of the catastrophe bond structure as a source of diversified capacity in a structured, multi-year format. He added that the strong capitalization of the global reinsurance and insurance-linked securities market has also softened reinsurance pricing and CAT bond spreads, making conditions more favorable for buyers. Evans said there are still no signs that investor demand is fading, even as spreads move closer to historical averages.
Hurdles remain
Hanni Ali, founder and CEO of Radix ILS, said lenders to data centers may also look to the CAT bond market to transfer risks tied not only to natural disasters, but also sabotage, war and cyberattacks. He argued that data centers represent a growing concentration of physical infrastructure assets and, given the ongoing war in the Middle East, should also be viewed as critical infrastructure.
In his view, reinsuring critical infrastructure through capital markets is a logical step, but the challenge goes well beyond pure natural-peril exposure.
Evans said the CAT bond market still has a long way to go before it can support the significant insurance limits required by rapidly growing data center development. It remains unclear which perils will ultimately be covered and in what formats. Still, he said these high-value digital infrastructure projects are likely over time to create meaningful exposure to natural catastrophe and severe weather risks, opening the door for ILS structures in multiple forms and for catastrophe bonds to gradually gain exposure to data centers.
