By Matthew Ferone, Associate Consultant, and Ed Harrison, Partner, from LCP
What data are we talking about and how useful could it be?
Our digital footprint includes a wide range of data including spending habits, location data, interactions with websites and apps, content we share and engage with on social media and more.
This data is already being used for purposes such as targeted adverts. However, socially, it feels like we are a long way from being comfortable with such data being used to price insurance.
Currently GDPR significantly limits the scope for insurers or tech firms to use our digital footprint in this way, so we simply don’t know what potential value it holds. That said, in an ultra price-sensitive and competitive landscape like the UK home and motor market, it’s not hard to imagine that additional insights into customer behaviour could lead to a competitive advantage for firms with access to this data in the future. For example, social media interactions or spending habits may reveal higher-risk behaviours, which could be relevant for some types of insurance.
Will there be a big-tech takeover in general insurance?
If tech firms have the data to understand customers’ risk better than insurers do, why aren’t they using this advantage to dominate the market with better risk selection and easier access to insurance products?
One reason is that there is much more to providing insurance than just data. Claims handling expertise, loss assessment and mitigation, and strong relationships with suppliers (eg car repair networks) are also critical components of meeting customer needs at an affordable price. The importance of these areas is frequently undervalued by new market entrants and remains a significant competitive advantage to established insurers.
The FCA investigates big-tech competition risks
In April 2024 the FCA published feedback statement FS24/1 considering the possible competition effects of big-tech firms’ entry into financial services.
The FCA says there is no evidence of harm to consumers at present, but identifies three areas of risk for the future:
• Access to our data could give big-tech a competitive advantage in the market, reduce market competition and increase barriers to entry.
• These firms could gate-keep access to the consumer market through their devices and digital platforms.
• Financial services firms’ dependence for services such as cloud computing could lead to big-tech’s increasing bargaining power.
The FCA is interested in exploring use-cases for the data that big-tech holds in a way that benefits consumers, using platforms such as its digital sandbox, which allows firms to collaborate on a proof of concept using anonymised financial data.
Ethical considerations
Insurers already use sophisticated data sources such as credit ratings to help price personal lines risks. Because this data provides such a strong proxy for risk, and because markets are so competitive, it would be nearly impossible for an insurer to survive without using it.
However, the use of credit rating and other such data is believed to be one of the drivers of the so-called poverty premium and ethnicity premium, where insurance appears to cost more for people with lower incomes or from ethnic minorities. There is no suggestion that insurers would do this deliberately, but it appears to be a by-product of very sophisticated premium rating systems.
Data from our personal digital footprint may intensify these issues, with insurers having to use the data in order to remain competitive but with more consumers potentially finding that they cannot get affordable insurance.
Where next?
It’s positive to see the FCA engaging with the challenges that big-tech could bring to the insurance market. Insurers need to be alert to evolving consumer sentiment around how rating factors are perceived, whether based on existing data or information that may be sourced from big-tech. Balancing the desire for better risk selection with careful management of reputational risk will be a challenging tightrope for firms to walk.
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