The rush to build data centres brings concerns of an “incestuous nature” in the artificial intelligence financing ecosystem, an executive of a Bermudian re/insurer said yesterday.

Christine Todd, the chief investment officer of Arch Capital Group, described how hyperscalers rely heavily on investment returns from competitors and complex, off-balance-sheet vehicles to finance data centre construction.

In a keynote address at the first Women in Reinsurance Conference at the Hamilton Princess Hotel & Beach Club, Ms Todd discussed macro shifts, AI vulnerabilities and sovereign debt.

Ms Todd raised concerns that tech firms are participating on all sides of a transaction to build data centres.

She told the nearly 300 female delegates that the incestuous nature of the AI ecosystem was an underappreciated risk to market resilience.

Hyperscalers’ earnings include investment in their competitors, for what she called a major part of their profits.

She said: “These are complex financing vehicles that are financing on and off, mostly off balance sheet, investment in AI.

“A lot of it is data centres. How are they making these investments? How are they affording [them]? How are they getting access to financial markets?

“They’re doing so by being each other’s brokers, clients, suppliers, customers and guarantors. And when one shoe drops, what happens to all of this intertwined risk? No one knows, but it is a risk.”

Ms Todd noted the fall in information-related jobs with the introduction of ChatGPT, “which could be a harbinger of things to come”.

She has also warned that inflation and higher interest rates can be expected to persist across developed and emerging markets.

The chartered financial analyst told delegates: “We’ve got the inflation in emerging markets and developed markets, increasing and at higher levels. And that’s uncomfortable. And that’s uncomfortable for how we operate in our business.

“And that's uncomfortable for our own personal balance sheet income statements.

“Expect going forward that interest rates are going to be higher. That’s just a permanent state from now on for all of us. And that’s in every country.”

The speech outlined a volatile global economy defined by elevated inflation, mounting sovereign debt, and interconnected artificial intelligence risks.

Ms Todd said bond markets are actively signalling heightened credit risk and fiscal vulnerability.

In the United States, interest expense is projected to become the second-largest line item in the government budget, trailing only Medicare and surpassing Medicaid spending.

She noted that since the 1800s, 51 out of 52 countries that reached a debt-to-GDP ratio of 130 per cent ultimately defaulted, restructured, or inflated their way out of trouble.

Governments will increasingly rely on inflation or currency debasement to manage unmanageable debt loads.

She said: “The US no longer has discretionary spending flexibility in the budget.”

The instability in France of skyrocketing interest rates and government bonds is just another example of the global difficulties.

“Why is that?” she asked. “Because governments are overly indebted, and the markets are worried about it. It’s reflected in a permanent elevation of interest rates, not only from inflation, but also because of increased credit risk. So if that’s not enough to make you feel uncertain, we’ve got more.

“The bond markets are telling us affirmatively, you should feel nervous. The world is a riskier place. And how is the bond market telling us that? It’s telling us by the volatility.”

She posted on a screen for delegates, movements of the “Move” index (Merrill Option Volatility Estimate) tracking the implied volatility of US Treasury yields derived from options across various maturities.

She also showed how consumers were increasingly “miserable” over the state of affairs: inflation, unemployment and escalating prices for food, energy and housing, while earning less real income.