Increased reliance on cloud-based services leaves businesses vulnerable to outage risk.
The cloud economy has experienced significant growth in recent years. Recent research by Parametrix found that use of the cloud is high among the Fortune 500 companies, for example. Of the 2022 cohort, 93.6% rely on the cloud for at least some of their activities. In 10 of 18 industrial sectors in the Fortune 500, 100% of the companies are cloud-reliant.
Businesses and individuals rely increasingly on cloud-based services to store, process, and access data and applications, with some, such as Netflix, Shopify, and Stripe, particularly vulnerable to outage risk. This trend has been driven by the many benefits of cloud computing, including flexibility, scalability, accessibility, and rapidly decreasing upfront capital expenditure. That rapidly growing reliance on remote third-party suppliers has left corporations and their insurers vulnerable to business interruption resulting from cloud downtime, and without proper risk transfer tools.
The ‘cloud economy’ in its broadest sense, is therefore enormous, encompassing almost every business and consumer in the world with an internet-enabled computer, tablet, or smartphone. More narrowly, the global cloud computing market size, defined by the amount spent on public cloud-based services, is forecast to grow 20.4% to total $675.4 billion in 2024, according to Gartner’s forecast in May 2024. And according to the latest update to the International Data Corporation (IDC), it is projected to reach $1.35 trillion by 2027.
According to data drawn from the quarterly financial reports of AWS, Microsoft Azure and Google Cloud - the cloud service providers respectively reached 13%, 19%, and 25.7% YoY growth in Q4 of 2023 (see table). AWS, the leading cloud provider, grew from an annual revenue of $80 billion to $90.7 billion in 2023. This growth is being driven by generative AI (GenAI) and application modernization.
Cloud outage risk exposures follow a similar trajectory, as more organizations move more of their data storage and computing activity to the cloud, and more economic value is therefore delivered by cloud-based businesses and platforms.
This post is the first in a series of posts introducing "Cloud-in-a-Box", risk-transfer mechanisms to hedge against specified cloud outages. In April 2024 Parametrix, in collaboration with Hannover Re, structured the first-ever parametric cloud outage bond "Cumulus Re", marking a significant milestone in addressing systemic cloud risks and the rising demand for reinsurance coverage.
Parametrix uses its proprietary technology both to analyze and constantly monitor cloud availability and performance, collect data and model outage risk. Data is collected for analysis and modeling of cloud outage risk. The probabilistic model offers a granular perspective addressing specific cloud vendors, regions, and services. The technology provides access to real-time monitoring of market-leading cloud services worldwide and enables structuring objective and transparent cloud-outage-risk hedging instruments.
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