This week, the FCA has issued a "call for inputs" around how insurance firms use big data. This initiative is aimed at deepening the FCA's understanding of insurers' current and future uses of big data. It also suggests that, at this stage, the FCA has not yet decided where it stands on the issue.
The call for inputs shows the areas of particular interest to the FCA and the issues that it is likely to focus on in any future market study that it undertakes on the topic. Insurance firms should be mindful of these when developing their big data strategies.
Defining "big data"
The FCA characterises "big data" as meaning:
- the use of new or expanded datasets and data, including from unconventional sources;
- adopting new technologies required to generate, collect and store these new forms of data;
- using advanced data processing technologies and sophisticated analytical techniques; and
- applying this data knowledge in business decisions and activities
Focus of its investigation – motor and home insurance
The FCA wants to form a "balanced view" of the impact of big data. It recognises that big data presents many opportunities to insurance companies and insureds and is keen to explore these. However, it also wants to understand the risks associated with big data in the insurance sector, especially on consumers.
It is therefore focussing its investigation on retail general insurance (GI) products, particularly in the context of private motor insurance and home and contents insurance. These are areas where, in addition to well-known big data "sources" (e.g. social media, social listening and data aggregators), insurers can potentially collect a huge amount of data on consumers' behaviour and lifestyle from technologies such as telematics and connected home devices. This gives rise to interesting questions in the context of pricing and risk profiling.
Within this general area of focus, the FCA intends to consider the following three topics:
Does the use of big data affect consumer outcomes?
- Big data has the potential to accelerate the trend towards "risk micro-segmentation" (i.e. the grouping of consumers into much smaller risk pools than before) due to insurers' improved ability to identify individual consumer characteristics. The FCA notes that this could result in changes to the premiums that consumers face. It might also change which retail GI products are available to which consumers, as insurers might be able to select more accurately which risks they choose to take on board. This could ultimately lead to some consumers being unable to find coverage.
- The FCA wants to understand the extent to which insurance firms are able to collect information about persons' characteristics or behaviour and use this to charge different prices to different consumers for reasons other than risk or cost.
- Big data may affect consumer behaviour. The FCA wants to understand the extent to which applications of big data designed to incentivise less risky behaviour (e.g. telematics devices in cars) may turn into requirements or conditions of accessing insurance in the future. It also wishes to consider how the use of big data may impact trust in retail GI firms and how this affects consumers' behaviour and the amount that firms are willing to invest in big data.
Does the use of big data foster or constrain competition?
- The FCA wants to explore whether big data improves or hinders consumers' ability to access and make choices about retail GI products and providers. How easily can consumers replicate or port data when they change providers and is this likely to result in barriers to switching?
- The FCA thinks that barriers to entry and expansion could be created by the used of big data. If an insurer is unable to make the required investment in big data, they could become uncompetitive and lose market share. Big data use could also increase or create a market power that could result in competition being restricted.
Does the FCA's regulatory framework affect developments in big data in retail GI?
- Can the FCA's current regulatory framework (including the Principles for Business, FCA Handbook and Guidance, non-handbook guidance and other regulatory communications and statements) constrain or foster the potential for substantial innovation that big data presents?
- The FCA is also interested in understanding how data protection legislation will impact how big data is being used in insurance. The FCA's focus on retail insurance suggests that it sees data protection as one of the biggest issues at play in this area.
The next step is for the insurance industry to respond with views, examples and evidence of how big data is impacting (and is likely to impact) consumers and competition within the sector. The FCA has asked for this by 8 January 2016 and the full details of what the FCA is asking for can be found here.
The FCA expects to publish a feedback statement mid-2016, in which it will set out its findings. This might include proposals for a market study or even a decision that no further work is needed. In any event, it will give a better steer as to whether the FCA believes there is a need for increased regulation in this area.
In the meantime, insurance firms should think carefully about how their big data strategies might impact their consumer customers, in particular the products made available to them, the price they pay and the impact on their privacy.