Companies collectively spent $61 billion on cloud infrastructure in Q4 2022, and there’s more growth to come. Yet, businesses are poorly protected from losses caused by cloud downtime.
“Cloud service providers typically offer service level agreements (SLAs) that outline their commitments to service availability and performance,” AV8 general partner Amir Kabir told TechCrunch+. But while penalties are usually involved should agreed-on service levels not be achieved, these rarely cover full losses that a cloud outage could cause its customers.
Case in point: After millions of websites went offline after a major data center fire in France, a small online seller complained in the press that her cloud provider, OVHcloud, was only offering her a voucher worth a few months of free hosting — around $30, when she estimated the actual damage as closer to $2,000.
For e-commerce businesses large and small, it is easy to see how cloud downtime can result in a loss of revenue. But cloud outages can have a negative revenue impact on businesses of all kinds, whether it is because of productivity loss, or because they have their own SLAs with customers to whom they may owe compensation.
The usual corollary of risk is insurance against it, but when it comes to cloud downtime, the insurance sector hasn’t fully caught up yet.
“We consider cloud outage as part of the ‘new risk’ category,” said Florian Graillot, the founding partner at astorya.vc. “Basically, it didn’t exist years ago. It is far from being commoditized on the market as most incumbents (insurers and reinsurers) are not offering it, yet, and it’s a growing risk.”
While not commonplace yet, cloud outage insurance is part of a broader trend that is enjoying tailwinds, Kabir said. “Cloud downtime insurance falls under the category of non-damage business interruption (NDBI) insurance, which has gained increased interest due to the recent pandemic and economic shutdowns. Unlike traditional business interruption insurance, which covers physical damage, NDBI covers situations with no physical damage, such as cloud downtime.”
Parametric cloud downtime insurance
Cloud downtime insurance is facilitated by the rise of another trend: parametric insurance. Under this model, companies don’t need to document the damage they suffered and connect it to a cause; they simply receive a previously agreed upon payout whenever a trigger event happens.
While most use cases of parametric insurance so far have revolved around weather events, the model has also been applied to cloud outage insurance, Graillot told TechCrunch+ in our latest insurtech investor survey. He cited the example of one of his portfolio companies, Swiss startup Riskwolf, which helps reinsurers provide parametric insurance for digital risks.
One of the advantages of parametric insurance is the ability to obviate lengthy claims processes in which small businesses would struggle to demonstrate how much they lost, Riskwolf CEO Thomas Krapf told TechCrunch+.
But to provide coverage, insurers need objective proof that downtime occurred and an estimate of the loss that it would typically cause, which is where insurtech comes in.
While parametric insurance is sometimes referred to as index-based insurance, there’s no such global index yet for cloud outages. One could be coming, though. Last November, TechCrunch reported on Metrist, a startup that “wants to become the trusted neutral player that buyers and vendors can refer to when they discuss outages.”
For now, Riskwolf is going for a straightforward monitoring approach that relies on third-party sources as well as technology but is meant to remain understandable. “It’s important to build up trust in the industry,” Krapf said. For him, it means that there “shouldn’t be too much AI in the way you do monitoring [or] modeling.”
Riskwolf isn’t the only company tackling this problem; there’s also Parametrix Insurance, which raised a $17.5 million Series A round of funding in 2021. (According to Crunchbase, Riskwolf has raised around $1.33 million to date.)
Go to market
With offices in Tel Aviv and New York, Parametrix Insurance sells its insurance products on its own website but also through brokers.
Howden Group is one of these partners and explains their joint policy as follows: “When an insured outage occurs, both the broker and the policyholder are proactively notified by Parametrix. As soon as the submission is verified, compensation will be issued within 15 days.”
As for premiums for cloud failures, Howden says they depend on several parameters:
- Cloud-IT provider.
- Type of services.
- Redundancy between regions.
- Coverage amount per hour.
- Waiting time.
- Maximum duration of coverage.
To find actual numbers on premiums, The Wall Street Journal shared some behind-the-scenes details on the company last year: “Policy premiums for Parametrix’s insurance can range from thousands of dollars annually to hundreds of thousands of dollars a year, according to the company. Coverage typically ranges from $100,000 to $5 million but can extend to $10 million in some cases.”
According to Kabir, cost considerations will be an obstacle to broader adoption of cloud market insurance. “As with any voluntary insurance product, the cost of premiums should be carefully considered against the potential losses a business may face during an outage. […] Moreover, those who might think of it or need it would need to pay large premiums.”
This is perhaps why it makes sense for cloud downtime insurance to be sold as an add-on to existing insurance products. While it might eventually fit into the business interruption category, Riskwolf’s Krapf said he thinks the most natural fit at the moment is cyber insurance.
Since brokers already ask IT-related questions to gauge security threats, they can also ask about cloud outage exposure at the same time. “Cloud availability is a topic you can naturally embed in this discussion without having to sell it as a standalone.”
Riskwolf’s approach is to provide reinsurers with templates that they can calibrate for their needs and clients. Similarly, Parametrix works hand in hand with the existing insurance sector. “While Parametrix created and oversees the policies, payouts are backed by reinsurance companies like Hannover Re and certain underwriters of Lloyd’s of London,” The WSJ reported.
“This opportunity is a great example of the need for insurtech and reinsurers to team up together,” Graillot said. He thinks that compared to traditional insurers, insurtech startups can more easily attract and retain tech and data talent. They are therefore better equipped to get a sense of new risks, size them thanks to new datasets and price them accordingly. It’s only the third step — insuring these risks — that is in reinsurers’ hands.
Reinsurers may also have more persuasion and marketing power to convince businesses that they need cloud downtime insurance — and they have their work cut out for them. “I believe the market for such a product is currently very limited as very few companies would want or need such an insurance product,” Kabir said.
Another consideration, he added, is that “many big businesses diversify their cloud usage across multiple providers, and some companies may not be significantly affected by short cloud outages.” If cloud downtime becomes extremely rare, it could make such insurance irrelevant; but it could also make premiums cheaper and therefore more attractive.
It’s definitely a bit early to tell how big the market for cloud downtime insurance might be, but its target audience might grow over time. Besides e-commerce businesses and those that have their own SLA commitments, fintech companies could also see the need to protect themselves against cloud-related losses.
“When your customers can’t transact, they stand to lose money. You’ll lose revenue and may contend with payouts, legal action for unmet SLAs, and even government fines,” Parametrix Insurance warns fintech platforms.
The startup is also broadening its coverage to include downtime, not only of major cloud service providers, but also of CDNs and of e-commerce services such as Shopify. This might be a clever diversification move, should pure cloud outages become more uncommon in the future, and could help broaden the reach of downtime insurance while keeping a parametric approach.