The Financial Conduct Authority has published its examination of the impact of Big Data in sales of general insurance such as motor cover.
It highlights that insurance firms are able to draw on increasingly sophisticated datasets and techniques for predicting risk, and that new developments in technology such as telematics and the internet of things offer the potential to radically expand the data available about customers.
Yet Big Data raises issues that range from moral and ethical to how the market may be constrained and how consumer outcomes may be affected, said the FCA.
After a call for input to the retail general insurance sector last November, the FCA has now decided not to launch an in-depth market review as it believes Big Data produces a range of benefits for consumers, such as innovation in products and services, and in particular telematics has the potential to help consumers change their behaviour in order to reduce their risk and lower their costs.
Nevertheless, the FCA found some concerns about some aspects of the impact of Big Data. One regarded risk segmentation, and the potential that very high risk consumers are no longer able to obtain or afford insurance for their risk.
Another related to insurance pricing policies which do not reflect a consumer’s risks, where Big Data might allow firms to spot opportunities to charge more to certain types of customer from looking at their ability and willingness to pay more or likelihood to shop around – the FCA refers to ‘price discrimination’.
It may raise concerns if this particularly impacts certain groups, such as older or vulnerable consumers.
It plans to discuss the increased use of data sources and data protection risks with the retail general insurance industry, and will examine pricing practices in a number of firms later this year.
The FCA has taken a keen interest in the growth of vehicle telematics in enabling the consumer to reduce their risk and possibly reduce accidents. It notes that in the USA and Italy there is focus on usage-based ‘pay as you drive’ schemes.
An implication of vehicle telematics in Big Data could be that insurers build a picture of precisely when and where accidents are more likely to occur, such as by analysing sharp braking trends on particular roads at particular times, and could adjust insurance policies and charges to reflect the risk a driver represents depending on when and where they drove.