Big data—are the regulators coming?

The Locomotive Acts of the1860s and 1870s introduced many sensible measures familiar to all motorists, such as vehicle registration and number plates. However, they are best remembered for their speed limits—2mph in cities—and the requirement that a man carrying a red flag should walk in front of vehicles hauling wagons. It would be three decades before the fledgling British auto industry successfully lobbied for the draconian limits of these ‘Red Flag Acts’ to be lifted, unleashing the modern age of road transport.

With the Financial Conduct Authority’s (FCA) recent launch of a ‘call for inputs’ (CFI) on the use of big data in the sector, does the UK insurance industry face a similar threat to innovation today?

Let’s start with the most important point: regulation is a good thing in markets selling complex products to the general public. It gives consumers the confidence to spend where they otherwise might not, and protects the competitive process that drives innovation and low prices. The latter is a particular priority for the FCA’s Strategy and Competition unit, which is leading this exercise.

However, regulators face a difficult balancing exercise when markets are in a state of dynamic change. Intervene too little or too late, and harmful market features may become baked in. Intervene too early or too heavily and there is a risk of inhibiting or distorting the very incentives that are necessary to drive further innovation for the benefit of consumers.

For big data, the latter risk is by far the greater. Its possibilities are just starting to be explored, much like motorised road vehicles in the 1860s. Big data will open up niche markets with non-standard risks, not to mention lowering overall costs to consumers by enhancing understanding of potential liabilities. But you don’t need a lawyer to tell you that.

Regulatory risks

The key question is, what is the regulatory risk? The FCA is a sophisticated regulator, at pains to understand the facts before it acts. It has been careful to emphasise that at this stage it has not identified any particular concerns with the way big data is being used, or is likely to be used.

However, the document does hint at some possible concerns. In particular, it suggests that better and more granular risk-profiling of consumers may result in some facing higher premiums, or being excluded from cover. It also worries that if some firms are foreclosed from access to certain forms of data they may not be able to compete effectively.

It is early days for the CFI so it is hard to know just what course is likely, but the potential is clear. To date only one other CFI has been finalised and that one has already led to two market studies, looking at the corporate and investment banking and asset management sectors.

So what could the consequences be? If the FCA similarly decides there are valid concerns around big data and initiates a more onerous formal market study to investigate the issues further, that could ultimately lead to the imposition of a range of remedies. These could include obligations to share key datasets to prevent their becoming monopolised, or to avoid discriminating against certain categories of consumers that are revealed by advances in big data to be more risky.

Clearly it is essential that the industry takes the CFI seriously and makes the case for progress quickly—the January 8 deadline is not far away. Right now, the challenge we face is making sure that the FCA has a full account of the facts—how this innovation will lead to better products and preserve a thriving, competitive insurance market for consumers.

Insurers, after all, are pioneers in this area and have been looking at large datasets for much longer than most industries to ensure that their valuable services can be provided at a fair rate of return. The industry is also in the business of making reasonable profits. If regulatory intervention were to make some risks unprofitable, they will cease to be covered. That is in nobody’s interest.

The wider case

The need is wider than just this FCA information-gathering exercise. We need to make the case with wider stakeholders, and should have an eye on other markets where regulators are yet to start getting to grips with the implications of the exciting and potentially unnerving potential of big data.

Failure to get the message across at an early stage could set the stage for more work down the line. While regulatory intervention could stifle the benefits of this exciting new technology, the uncertainty that would go with extended regulatory investigations could itself hinder investment and development, holding back not only the benefits to the UK consumer, but the competitive position of the UK industry.

This would be unfortunate. Not only for the industry itself, but also for the wider world. Insurance has played a vital part in the development of the modern world. It helps others to manage risk so that they can live, do business and invest.

Could the industry survive and prosper with unnecessary limits on the development and use of big data? Possibly. But it would be far better for us to act early and not have to find out the answer to that question, and far better to act early to help the regulator get to grips with these new developments. The FCA is as keen as we are to avoid imposing regulation that future generations will see as a new ‘Red Flag Act’.