Last week the FCA published a feedback statement on the use of big data in the retail commercial insurance sector. Its findings are likely to come as welcome news to insurers who are keen to exploit the advantages that big data can offer.
Insurance firms have always been concerned with predicting and assessing risk using the wide array of information available to them. Over the last few years an increase in computing power has opened up the possibility of analysing increasingly large datasets, collected from diverse sources including social media. This has brought with it a range of additional challenges.
Unsurprisingly, this innovation in the use of data has attracted the attention of the FCA, which issued a "call for inputs" from Insurers in November 2015 (which we reviewed here). The purpose of this was to inform the FCA's understanding of the uses of big data in the commercial insurance sphere. In particular it aimed to identify the benefits and risks associated with big data, how they might evolve in the future and how they might impact on consumers.
After receiving numerous responses from insurers and meeting with a variety of key stakeholders, last week the FCA published a feedback statement outlining its findings and considering the next steps. The FCA's review focused on the use of big data in the retail general insurance sphere, however many of the findings will be equally applicable to other areas of insurance and retail financial services where the use of big data is becoming increasingly prevalent.
The FCA's findings
The FCA found that big data produces a wide range of benefits for both consumers and insurers. In particular, the FCA highlighted the fact that big data has allowed firms to develop new and innovative insurance products.It can also be used by firms to transform how consumers deal with insurance firms, streamlining both the sales and claims processes.
Despite this, the FCA's feedback statement still identified a number of concerns that it had with the use of big data. These concerns focused on two main areas:
- Risk Segmentation - Big data can potentially increase risk segmentation as it can be used to model a consumer's risk profile more accurately. This raises the possibility that some consumers, deemed higher risk, may be unable to obtain insurance or may be unable to afford any such insurance. However, in the parts of the general insurance sector that the FCA reviewed, they found that these concerns are not yet materialising. Going forwards, the FCA has promised to remain alert to the potential exclusion of higher risk customers as a result of increased big data analysis and have said they will engage the government if this becomes necessary.
- Pricing Practices – Insurers may use big data to enable them to price risks in ways which do not reflect a consumer's risk profile or the cost of providing such insurance. This is because big data may enable firms to identify certain customers or types of customer who have the willingness or ability to pay more for their insurance, leading to poorer consumer outcomes. At this stage, the FCA plans to further investigate pricing practices of firms in the general insurance sector but has promised to intervene only "if we identify one or more market issues where we think a regulatory intervention would improve the outcome".
There was also a concern raised by the call for inputs that the use of big data may hinder competition, by acting as a barrier to entry. However, the FCA found no evidence of this.
Following this analysis the FCA has decided not to launch a full market study into the use of big data. Instead it will be taking forward the measures detailed above as well as looking to stay up to date with developments in the market through its usual supervisory and intelligence activities. It has also offered to jointly host a roundtable discussion with the ICO with the aim of discussing the increased use of different data sources and the data protection risks associated with this.
Commenting on the study and this decision, Christopher Woolard, director of strategy and competition at the FCA said, "There is potential for Big Data to transform practices across general insurance markets, and some consumers are already seeing benefits but there are also some risks to consumer outcomes. While we have decided not to launch a full market study, we are undertaking further work in this area and with the Information Commissioner’s Office to ensure our rules and policies keep pace with developments in the market, but also do not prevent positive innovations."
On the whole, the FCA's decision is likely to be welcomed, especially for insurers who are well down the track of exploiting the advantages of big data. However, the situation may of course change (e.g. if the FCA sees any of the identified risks materialising). In addition, the FCA is, of course, not the only regulator/supervisory body that has big data on its agenda, plus there is the not insignificant matter of the impending impacts of the General Data Protection Regulation to consider.