Out-Law News | 22 Sep 2016 | 2:42 pm | 3 min. read
The FCA carried out a call for inputs exercise late last year on the topic of big data use by retail general insurers. In a new statement it has released in response to the feedback it received, the regulator said the exercise returned "largely positive" findings on insurers' use of big data (65-page / 806KB PDF).
Insurers' increased use of data and data analytics software is "broadly having a positive impact on consumer outcomes, by transforming how consumers deal with retail GI firms, streamlining processes and encouraging more innovation in products and services", it said.
However, the FCA said it does have some concerns about "some aspects of the impact of big data" in the market.
"Our work identified two areas where increased use of big data has the potential for mixed outcomes with cause for concern that some consumers may be worse off," the FCA said. "The first of these relates to how firms assess and categorise the risk of a consumer making a claim (i.e. the likelihood of a claim and the firm’s appetite to take that particular risk on). Specifically, the concern is the potential consequences of increased ‘risk segmentation’ as a result of big data."
"Risk segmentation has always been a key part of the insurance business. Increased risk segmentation may result in improved outcomes for some consumers, but we are concerned that it could also result in categories of consumers with higher risks that are no longer able to obtain or afford insurance for the risk they represent," it said.
"The second concern is about ‘pricing practices’ which do not reflect a consumer’s risks or the cost to serve. Big data may improve firms’ ability to identify opportunities to charge more to certain types of customer, for example looking at their ability and willingness to pay more i.e. not risk or cost based. This is referred to as ‘price discrimination’ or ‘price optimisation’. It is a common feature in many industries, but can lead to poor consumer outcomes in some circumstances," the FCA said.
Despite its concerns, the regulator said it has "decided not to launch a full market study at the present time".
The FCA confirmed, though, that it intends to look into "pricing practices" employed by "a limited number" of firms operating in the retail general insurance market later this year. It said that whilst price discrimination is "not necessarily problematic" it can, in some cases, "lead to concerns about the outcomes for consumers".
The FCA also said it plans to host a roundtable event in conjunction with the UK's Information Commissioner's Office (ICO) on the topic of "the increased use of data sources and what data protection risks arise as a result". It said some insurers had "expressed concerns about data protection rules and the use of data" and that they elect "not to use some consumer data in pricing" because of general concerns consumers have about the way their data is shared.
The call for inputs exercise also asked for feedback on whether insurers' use of big data fosters or constrains competition. The FCA said its review, which involved looking into the specific motor and home insurance markets, "did not find that the growing use of data currently limits effective competition".
However, the FCA said "pricing practices not related to risk or cost can be a symptom of underlying competition issues".
"For example, firms may be able to price in this way because some consumers are finding it difficult to search for and/or act on a better deal," it said.
The FCA said it has also not seen evidence that prospective new entrants to insurance markets face barriers to entry because they have difficulty "accessing complex datasets". The evidence is that drivers that hold telematics-based motor insurance cover do not "currently experience difficulties in switching providers", and firms have not raised complaints "relating to the lack of portability of telematics data" either, it said. The FCA said, though, that it was aware such problems could arise in future.
Christopher Woolard, the FCA's director of strategy and competition, 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."