FCA publishes Call for Inputs into Big Data in retail general insurance

The FCA has issued a Call for Inputs (“Cfi”) into Big Data in retail general insurance (“retail GI”). The Cfi follows the FCA’s commitment in its 2015/2016 Business Plan to conduct a market study into how insurance firms use Big Data and begins a fact-finding exercise intended to help the FCA better understand how the use of Big Data has developed in recent years, and how this might change in the future.

The FCA has decided to focus on retail GI given the significance of the sector, the importance of data to this sector, and the potential for Big Data to alter the way risk is assessed. Whilst the scope appears to be very broad, the FCA has said that in order to frame its analysis it will focus on private motor, home and contents insurance.

The FCA is asking for information in relation to three topics:

  1. Does the use of Big Data affect consumer outcomes?
  2. Does the use of Big Data foster or constrain competition?
  3. Does the FCA’s regulatory framework affect developments in Big Data and retail GI?

Stakeholders have until 8 January 2016 to submit a response. Experience shows that early engagement by stakeholders presents a real opportunity to influence the direction of the FCA’s work and ultimately its outcomes. You should therefore consider the potential impact this could have on your business and how to engage in a way that will best assist your organisation.

In the meantime, the FCA will in any event engage with the industry through meetings, discussions and by sending out information requests. The FCA’s findings are due to be published by mid-2016 at which point the FCA is expected to confirm whether or not it intends to launch a market study and on what terms.

What is Big Data?

Big Data is a difficult term to define precisely. It refers to the large quantities of data available from a variety of sources, being used to analyse people’s behaviour. This enables companies to tailor products and service to the specific consumer.

r the purposes of the Call for Inputs (“Cfi”), the FCA has defined Big Data as:

Big Data is a difficult term to define precisely. It refers to the large quantities of data available from a variety of sources, being used to analyse people’s behaviour. This enables companies to tailor products and service to the specific consumer.

For the purposes of the Call for Inputs (“Cfi”), the FCA has defined Big Data as:

  1. the use of new and expanded data sets including data from unconventional sources such as social media;
  2. adopting the technologies to generate, store and collect this data;
  3. using advanced data processing technologies;
  4. using sophisticated analytical techniques such as predictive analytics; and
  5. applying this data knowledge in business decisions and activities.

As the FCA acknowledges, data is used extensively in the insurance industry particularly in the retail general insurance (“GI”) sector: insurers profile customers and price their policies accordingly. The FCA is interested in finding out how Big Data has changed the industry and how it will change it in future.

Issues the FCA is interested in

Potential impact on consumers

The FCA is keen to understand what impact the use of Big Data by insurers could have on customers. In particular they want to understand if the use of Big Data could enable or restrict consumers’ ability to access, assess and compare product information and prices.  The FCA understands that whilst consumers may benefit from greater flexibility and choice arising from firms’ ability to use Big Data to offer more informed product designs and a broader variety or more tailored range of products there are also risks that some consumers could find it increasingly difficult to compare pricing schemes, eligibility criteria and key product features.

The FCA will explore whether Big Data affects choices that are available to consumers as a result of micro- segmentation of risk (i.e. the process whereby traditional risk pools become smaller as insurers are able to further segment consumer characteristics and risk profiles). For example, increased micro-segmentation could result in the reduction or inflation of premiums as smaller risk pools enable insurers to more clearly define categories of risk and allocate premiums appropriately. Moreover, firms may be able to use Big Data to understand consumer behaviour in more detail and offer lower prices to consumers who may be about to switch.

The availability of products for certain consumer categories may decline as insurers are able to more effectively identify the risks they wish to insure and exclude less profitable and/or higher risk consumers. This could result in competition being constrained by a lack of ability for certain consumers to switch to alternative products.

Potential impact on insurers

The FCA also hopes to understand how Big Data may change insurers’ behaviour and the impact that this may have on competition between insurers. For instance, Big Data could facilitate new market entrants as they are  able to more accurately predict risks and design new products, pricing and distribution models that have the potential to disrupt the status quo than would otherwise have been possible. Alternatively, Big Data could increase barriers to entry because the high costs of investment in technology may restrict the ability of new entrants to acquire or reproduce the “critical data”.

Other sector features

Finally, the FCA notes that it intends to consider whether economies of scale and scope in the use of Big Data exist and whether such efficiencies could create an unbalanced market by providing larger multi-product firms with a competitive cost advantage over smaller niche insurers.

Market studies

If the FCA decides to launch a market study, this will not be the first market study in the insurance sector. The General Insurance Add-on market study found that “selling a product as an add-on often leads to consumers purchasing products that are of poor value and not what they needed and that the value of general insurance products is not always clear”. In order to deal with the issues identified, the FCA proposed a number of remedies, including banning opt-out selling and improving product information provision. The FCA is now in the process of finalising its new rules to enact these remedies. These rules will come into force on 1 April 2016, while the information provision nonHandbook guidance came into force in September 2015, with firms expected to have made the necessary changes to their “sales journey” by 30 September 2016.

Stakeholders therefore should be mindful that the FCA has a wide set of tools under its market studies regime to deal with issues affecting how well a market is functioning.

Pre-emptive action may help the industry resolve and head off issues at an early stage, avoiding the risk of unwelcome remedies. The insurance industry should therefore consider how best to steer the FCA by taking the time to engage with this exercise and consider the merits of responding to the Cfi.

The broader context

The topic of Big Data is extremely topical, and insurers may find it helpful to think about the issues raised by the FCA also in a broader context.

Data privacy

There is an increasingly close correlation of themes and enforcement as between data protection, FCA rules, and consumer protection more generally but this relationship is symbiotic and so a toughening regime in data protection could ironically negatively impact on the working of the insurance market and availability of new product and more accurate consumer tailored pricing of premiums. With the draft EU General Data Protection Regulation also on the near horizon and likely to bring with it greater compliance burdens and restrictions, alongside changes in insurance laws, firms need to consider carefully whether their current approaches in relation to personal data need to be upgraded to enable Big Data programmes to proceed or could act as a barrier to those plans. With tighter controls specifically on profiling, for example, this is expected to be a strong theme in replies to this Cfi. Some of the topics firms should ensure that they address in connection with Big Data programmes include: –

  • Transparency – Communication with individuals and regulators about what data they collect, how they collect, store, analyse and otherwise use and share personal data;
  • Lawful use criteria – Are there other applicable lawful use reasons or is consent required;
  • Secondary use – Strictly limit and control the use of personal data for reasons other than those for which originally collected and notified to the individual concerned;
  • Adequacy – Utilising only the information needed to undertake tasks required and avoiding excessive collection and processing;
  • Data Sharing – Who will process the data, with whom will it be shared and the appropriate contractual or other protections which need to be put in place;
  • Exemptions – Understanding the scope and limits of application of research and other exemptions to aspects of the data protection regime;
  • Anonymisation – Understanding how to depersonalise so as to remove from the remit of personal data;
  • Accountability – An overarching approach to how they obtain, process, store and share data in a way which takes responsibility for achieving data protection and compliance; and
  • Controls – the measures which will be adopted to ensure the required compliance standards and limitations on data use are embodied within firms’ processes beyond the statements within written policies.

Insurance regulation

Big data also has significant implications in the operation of the insurance and reinsurance market as a whole, particularly in the context of a policyholder’s pre-contractual disclosure. Under the new Insurance Act 2015, the policyholder does not need to disclose anything that the insurer knows, ought to know, or is presumed to know. Insurer’s use of Big Data may be deemed as information that the insurer knows which under the new Insurance Act may lead to uncertainty, and therefore disputes, over the scope of the insurer’s knowledge, and therefore whether the policyholder complied with his duty.

European developments

A regulatory review of Big Data is not a UK phenomenon. It has been reported that the French and German authorities are about to conduct their own joint study into Big Data and competition. In the background, the European Commission is also in the process of developing a “digital single market” across the EU, whose focus includes data protection and effective competition.