Insurers’ use of big data means certain consumers could miss out on cover, the UK’s financial watchdog has found, although it has shied away from launching a full inquiry into the activity.
The use of big data — where information on consumer behaviour is gleaned from sources such as social media, customer loyalty cards or aggregator sites — by general insurers is “broadly positive” but the Financial Conduct Authority said it means some customers will potentially find it harder to be accepted.
The regulator added on Wednesday that it is also concerned that big data might push insurers to charge certain customers more.
Big data is used across the financial sector but has become particularly important to insurers who use information about consumer behaviour to calculate premiums. Social media also enables insurers to verify whether claims are fraudulent.
But there are mounting concerns that personal information is being used in ways not made clear to them when they sign up for social media or other platforms.
The FCA is putting insurers on notice that they must comply with data protection and privacy rules when using big data.
While the FCA shares concerns that big data could push insurers to withhold cover to high-risk customers, it said there was no evidence yet that this was happening. It added it would “remain alert” to this issue, known as risk segmentation, and would report to the government if its concerns grew.
But the regulator declined to launch a full market study, which was one possible outcome when it called for more information around the issue in November. This decision will be a boon to the industry, which sees big data as a great hope for the future, investing millions of pounds in new systems to better understand customer behaviour. Insurers hope that by better analysing the risks that each policyholder faces, they cannot only price their products more accurately but also advise customers on how to avoid problems.
“Some consumers are already seeing benefits but there are also some risks to consumer outcomes,” said Christopher Woolard, the director of strategy and competition at the FCA. “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.”
The FCA is just one watchdog to have financial companies’ use of Big Data on its radar. The EU authorities have said that they will press on with their call for information on Big Data usage this year.
The FCA’s findings come after the Chartered Institute of Insurers warned in July that big data could create an “underclass” of people who cannot afford insurance.
An earlier study by the Association of British Insurers in 2013 found that 71 per cent of consumers would be unhappy with insurers pricing their products based on information gathered from social media.
James Bridge, the head of conduct regulation at the ABI, said: “Insurers believe that Big Data can make insurance work better for customers, improving the claims experience and creating personalised and innovative products. It’s good to hear that the FCA’s findings are in line with this, with the call for input concluding there are ‘broadly positive consumer outcomes’. Insurers take their responsibilities regarding data very seriously and we will continue to work with the FCA and ICO to ensure that approaches to data work well for customers.”