The FCA today published a feedback statement following its Call for Inputs on Big Data in retail general insurance.
The FCA announced in November 2015 that it wanted to better understand the use of data by firms and how this affected consumer outcomes and competition in the general insurance sector before considering next steps.
The FCA found broadly positive consumer outcomes resulted from the use of Big Data. It can be used by firms to transform how consumers deal with insurance firms, allowing firms to develop new products as well as reducing form-filling, streamlining sales and claims processes.
The FCA identified two areas where the use of Big Data had the potential to leave some consumers worse off. Big Data changes the extent of risk segmentation so that categories of customers may find it harder to obtain insurance. The FCA is also concerned about the potential that Big Data might enhance firms’ ability to identify opportunities to charge certain customers more.
In light of the feedback received and evidence examined the FCA has decided not to launch a market study at the present time, but will take forward a number of measures designed to further engage with the industry.
Christopher Woolard, director of strategy and competition at the FCA said:
“The general insurance sector is vitally important, impacting millions of consumers so it’s important that the market works well.
“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.”
The FCA found that Big Data can improve consumer outcomes but its use could also affect pricing practices. The increasing amounts of data from a wider range of sources, alongside sophisticated analytical tools, might lead to the use of reasons other than risk and cost in pricing becoming more prevalent. To assess how different pricing factors are used, we will start a piece of work to look at pricing practices in a limited number of firms in the retail general insurance sector later this year.
Some respondents to the Call for Inputs considered that there is the potential for Big Data to increase risk segmentation and consequently lead to consumers with higher risks being unable to obtain affordable insurance. The FCA carried out further review of parts of the GI sector and this indicated these concerns were not yet materialising. However, the FCA will remain alert to the potential exclusion of higher risk customers and will engage with government if concerns begin to develop because of how firms are using Big Data.
As part of the feedback statement the FCA has also reminded firms of their responsibilities to consumers, particularly ensuring that use of data is in line with data protection legislation and guidelines from the ICO. The FCA will also be co-hosting a roundtable with the ICO later this year on the use of data in retail general insurance.
Pricing based on reasons other than cost drivers, such as risk, are also considered in an Occasional Paper on price discrimination and cross-subsidy in financial services which we are publishing today alongside the Feedback Statement.