City watchdog to look into the use of ‘big data’ by insurers

Study to see if collection of vast amounts of digital information is bad for customers

Stewart Ford was slapped with a record-breaking £75m fine, has hit back with a £700m High Court claim against the Financial Conduct Authority (Reuters)

Insurers collecting swathes of digital data from customers to price premiums more accurately are under the microscope over concerns that the trend could drive up costs for some customers.

The Financial Conduct Authority (FCA) has launched a preliminary study of how “big data” – the rapid collection and analysis of huge amounts of digital information – is affecting product choice for consumers and whether it reduces competition in the sector. The City watchdog’s review could be followed by a full-scale investigation.

It has been sparked by the new types of data on offer to insurers due to the proliferation of smartphones, supermarket loyalty cards and price-comparison sites. Specific technologies such as in-car telematics boxes, used in motor insurance to gather driving statistics, and healthcare devices have also alerted the regulator to the mounting changes in the industry.

“Big data is having an ever-growing social and commercial impact, and has the potential to transform practices and products across financial services,” said the FCA’s director of strategy and competition, Christopher Woolard. “We are starting our work on big data by seeking to better understand how insurance firms are using data, and how this may evolve in the future.”

The study is intended to make sure customers get a fair deal and to keep the industry competitive.

The FCA said one consequence of the shift to comprehensive data collection could be insurers moving away from pooling large numbers of customers, and towards micro-segmentation of consumers based on how risky they are. This could lead to some being taken out of the market.

Fears that customers will also become more wary of insurers or even change their lifestyle – for example, avoiding unhealthy foods in supermarkets to drive down health insurance premiums – will also be examined.

The Association of British Insurers’ head of strategy, Matt Cullen, said: “Big data can make insurance work better for customers by improving the claims experience and creating personalised and innovative products.

“Insurers take their responsibilities very seriously, and treat personal data sensitively and securely.”

The regulator will examine whether the trend benefits some insurers more than others. For example, supermarkets offering insurance may be able to price more accurately given they have greater access to customer shopping habits than traditional insurers.

Likewise, companies that are leaders in big data – for example, Twitter and Facebook – could also be tempted to move into the insurance sector if it starts to favour their particular expertise.

The FCA study, a so-called “call for inputs” exercise that stops short of a full-scale inquiry, will focus on general insurance products such as motor cover, used by 20.1 million drivers in the UK.

Home insurance products such as contents cover, with 20.4 million policyholders across the country, and buildings insurance will also be in the spotlight.

The watchdog will report on its findings next year and could follow up with a full market study if it believes issues need to be addressed.