Insurance Big Data – FCA decides not to launch study, but warns of concerns

On 21 September 2016, the Financial Conduct Authority (FCA) announced that it will not be launching a market study into the use of Big Data in retail general insurance. Big Data refers to extremely large sets of information on, for example, consumers and their behaviour, which has been gathered from sources like social media and aggregator sites.

The FCA issued a Call for Input in November 2015, receiving feedback from insurers, consumer groups, industry bodies and other interested parties. The responses were focused on:

1. Does the use of Big Data affect consumer outcomes?
2. Does the use of Big Data foster or constrain competition?
3. Does the FCA’s regulatory framework affect developments in Big Data in retail general insurance?

Positive effects of Big Data

The FCA now confirms that it considers Big Data to have a broadly positive impact on consumer outcomes by, for example:

• transforming how consumers engaged with retail general insurance firms;
• streamlining insurance processes;
• encouraging innovation in products and services;
• improving firms’ ability to predict the likelihood of events happening; and 
• allowing consumers to change their behaviour.

Importantly, the FCA also found that the increased use of data does not currently in itself limit effective competition. The FCA considers that the benefits it found are such that a market study is not warranted at this time.

Potential risks

However, the FCA noted that there are potential dangers with Big Data, which stem from its ability to make information easier to access and products more difficult for consumers to compare (because of complex features and pricing structures). Importantly, the use of Big Data could also give rise to competition concerns and limit effective competition if it allows firms to increase or create market power.

The FCA identified two key potential areas of concern stemming from the increased use of Big Data:

1. Risk segmentation – it could change how firms assess risk, so categories of consumers may find it harder to obtain and afford insurance, and
2. Pricing practices – it may affect firms’ pricing practices, by improving their ability to identify opportunities to charge more to certain types of consumer, such that pricing does not reflect a consumer’s risks or the costs incurred in serving that consumer.

As a result, the FCA intends separately to examine the pricing practices of a limited number of firms dealing in the retail general insurance sector. The FCA has published an occasional paper focusing on cross-subsidies and price discrimination to examine whether either could exclude rivals and cause other competition issues.

The FCA warns that it will remain alert to potential dangers of Big Data and will engage with Government, should such dangers begin to crystallise.

Wider implications

The FCA’s emphasis on the benefits of Big Data and its decision not to carry out a full market study at this time is encouraging for businesses who use Big Data (both in the retail insurance sector and more generally). It also reflects the comments of Margrethe Vestager (European Commissioner for Competition), who acknowledged in a recent speech that competition law should not limit the enormous potential of Big Data. However, Vestager also said that competition law should ensure that data is not used in a way that has a detrimental effect on consumers, reflecting the comments of the FCA.

There is no doubt that the use of data is a growing focus for competition authorities across Europe and, although the current position of the FCA is encouraging, businesses should take into account the potential competition law implications when using Big Data.