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FCA CEO Andrew Bailey illustrates big data limits for insurers
November 25, 2016 News big data Insurance Industry


The increasing use of big data in the insurance industry requires a framework which clarifies the limits, according to UK’s regulator Financial Conduct Authority.

Big data is allowing insurers to refine their risk assessment of clients, but the FCA is preparing to step in if carriers exploit vulnerable individuals or cross certain boundaries which conflict with public policy.

The use of telematics in motor insurance for example allows for an individual assessment of a cover holder’s driving behaviour and for a tailored pricing. In a similar way, health insurers are increasingly taking cover holders’ behaviour into account for policy pricing.

Big data allows insurers to move the boundary between risk assessment based on aggregate model behaviour towards risk assessment based on observed behaviour, FCA CEO Andrew Bailey (pictured left) said during the Association of British Insurer’s 2016 annual conference. As a positive result of that behaviour may change and therefore risks may be reduced.

But big data does also, for example, allow insurers to figure out which individuals compare prices and which do not, theoretically allowing carriers to offer more competitive prices to the former and higher ones to the latter group. Bailey questioned if this should be allowed as some individuals are more vulnerable and may need the regulator’s protection to avoid being exploited.

“We have to make judgments on what is acceptable and what isn’t,” Bailey said. Promoting better driving through telematics for example, is in line with public policy, he said. However, if gathered information on the customer leads to some form of exploitation depending on the characteristics of the customer, the regulator may have to take action. Bailey said that the may have to create a framework which defines the limits.

To make his point clear, Bailey pointed to the possibility that genetic identification could revolutionise the ability to predict life expectancy and the capability to predict the probability of individuals suffering from dementia. The implications for life insurers are potentially very profound as they are for medical insurance. But the individuals affected may not be able to reduce their risk by changing their behaviour. If these probabilities were taken into account in the insurers’ policies this would affect the sector’s core task to diversify the risk in society.

“We do need to have a very clear framework in how we analyse and assess and come to conclusions and then come to action on these issues,” Bailey said.

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