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24 February 2017
The staggering rise in Big Data volumes ready to be dissected, analysed and potentially turned into improved products and profits is also prompting government and regulatory inquiries that are gathering momentum.
The Federal Government this year asked the Productivity Commission to investigate the impact of increasing availability of public and private data, with an issues paper receiving 150 submissions.
In the UK, the Financial Conduct Authority (FCA) has focused on retail general insurance, saying it will look further into the sector’s Big Data usage, after last year inviting comments on the matter.
“Big Data raises issues that range from moral and ethical to how the market may develop or be constrained and how consumer outcomes may be affected,” it says.
“Many of these issues are not new in insurance but can be accelerated and magnified by Big Data.”
The FCA says it does not want to block innovation and the benefits Big Data can bring, but responses to its consultation have highlighted some concerns.
Among those is the potential double-edged sword of more finely assessing individual risks.
While some customers are likely to benefit, others may find themselves in a higher-risk category and unable to obtain affordable insurance.
“We carried out a further review of parts of the general insurance sector and this indicated these concerns were not yet materialising,” the FCA says. “However, we will remain alert to the potential exclusion of high-risk customers and will engage with government if concerns begin to develop because of how firms are using Big Data.”
Another issue highlighted was whether customer data could allow policies to be priced for reasons related to buying habits, rather than risk and costs.
“Two consumers with the same risk profile or, more accurately, the same total cost to supply, could potentially buy the same insurance product at different prices, based on drivers including their sensitivity to price or likelihood of renewal,” the FCA says.
“The consumer will often not be aware of this difference because they only see their own price quote.”
The FCA says it will look at pricing practices in a limited number of retail general insurance businesses later this year, to get a better understanding of the issue.
“This will be a discovery piece of work and we would only intervene if we identify one or more market issues where we think a regulatory intervention would improve outcomes.”
More broadly, issues surrounding privacy and data protection are also under scrutiny and will be examined at a roundtable event later this year, co-hosted by the FCA and the Information Commissioner’s Office, which plays the lead role in that area in the UK.
The FCA notes insurers are also grappling with quandaries including potential use of information available through Twitter and Facebook.
It says social media data is used in claims handling and verification. But it has not heard of businesses using it in underwriting and pricing, due to its unstructured nature, doubts about accuracy and concerns over being too invasive.
“Several firms told us they did not use social media data because of how consumers might react, and that using it could result in reputational damage.”
The FCA says Big Data is now playing a role across the product lifecycle, and while insurers’ underlying pricing models have not changed fundamentally, they are using more data to supplement information provided by consumers.
The most developed example is in-car telematics devices, which give driving information.
Insurers are also starting to explore how they might link insurance with smart home data, which could indicate circumstances such as leaking pipes or open windows.
Overall, the UK regulator says the increasing use of Big Data is broadly positive, transforming how consumers deal with retail general insurance businesses, streamlining processes and encouraging innovation in products and services.
But the FCA is determined it will not be left flat-footed as the ever-increasing supply of data and improved technology keep opening up possible rewards and new pitfalls.
It wants to be close enough to the latest innovations to understand the risks and opportunities and ensure the right regulatory environment. It will also liaise with various European bodies carrying out their own work on Big Data.
With all that attention, insurers must keep a close eye on the regulatory picture.
“The general insurance sector is vitally important, affecting millions of consumers, so it’s important that the market works well,” FCA Director of Strategy and Competition Christopher Woolard says.
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