A future in which technology companies have access to online consumer data and data from the Internet of Things while insurers are shut out could emerge if insurers don’t earn the trust of consumers.
A research report, “Big Data and Insurance: Implications for Innovation, Competition and Privacy,” published by The Geneva Association last week presents this scenario as one of five future states for insurance competition.
Under this scenario, technology companies can use their informational advantage over traditional insurers to enter market segments promising the highest margins—targeting low risks and offering them an attractive prices—while the portfolios in incumbent insurers deteriorate.
Painting an even bleaker picture, the report suggests that the technology companies could ultimately dominate the market, with traditional insurers finding their roles reduced to pure risk carriers without contact with end customers, or even driven out of the market entirely.
All may not be lost, however, depending on the distribution of high and low risks willing to share data with traditional insurers and the speed at which insurers can invest in technology to collect their own data. And some large insurers may partner with technology players, shifting the dividing line between winners and losers from technology companies and insurers to insurers with access to data and those without.
This scenario, referred to as “Insurance at two speeds” in the report, falls between an imagined scenario of a entirely “digital society” characterized by a completely free flow of information (with insurers and technology companies having equal access to data with similar regulatory restrictions), and one of “digital backlash,” in which restrictive regulations prevent both established insurers and new market players from using certain types of data.
There’s also a promising alternative scenario in which insurers earn consumers’ trust to establish themselves as trusted data managers.
Imagine, for example, that a large provider of social networking, such as Facebook or Twitter, suffers a cyber attack in which sensitive user data is made publicly available. With people losing trust in the ability of their governments to protect them, insurers could establish themselves as trusted third parties. Reversing the roles outlined in the “Insurance at two speeds” scenario, here insurers rather than technology companies would be in the lead. Competition could decrease, however, if only large insurers could establish themselves as trusted data managers.
For each of the future state scenarios, the report spells out the roles of insurers (large and small), the impact on competition, resulting informational asymmetries, and the impacts on consumers and society. It also outlines public policy issues to be addressed under all scenarios.
The use of big data analytics in insurance offers significant societal benefits, as improved understanding of risks can inform risk reduction and enhance insurability, the Association said in a media statement about the report. However, individuals, firms and regulators face complex tradeoffs when balancing the benefits and risks of using personal data from digital sources to calculate insurance premiums.
Benno Keller, Special Advisor on Digital and Innovation and author of the report, said in the statement: “The challenges with big data usage demonstrate the importance of building trust to enhance consumers’ willingness to share their personal data with their insurers. Regulation, in particular regarding access to and use of personal data, should strike a difficult balance between ensuring privacy and promoting competition, innovation and welfare for individuals and society.”
Anna Maria D’Hulster, Secretary General of The Geneva Association, said: “In many instances, better data makes it possible to better align premiums and risks and to reduce the overall cost of insurance. This has great economic and societal benefits. New approaches to encourage prudent behavior can be envisaged through big data, thus new technologies allow the role of insurance to evolve from pure risk protection towards risk prediction and prevention.
“However, the use of big data in insurance also raises tradeoffs with respect to competition, individualization of products and customer privacy,” she added.
In addition to outlining the five scenarios and describing the benefits, costs and tradeoffs of big data use, the report also gives three specific examples of big data—from telematic devices in automobiles, social media platforms and wearables.
In discussing telematics, the report notes the potential societal benefit of significant risk reduction as most customers respond to feedback on their driving behavior. But concerns range from consumer worries about intrusiveness and fairness (possible discrimination if, for example, driving in neighborhoods considered unsafe correlates with belonging to a specific societal group) to worries about the impact on competition. With car makers increasingly building telematics systems into standard car models, they could use the data recorded by these systems to offer car insurance policies as a package with the car itself, the report says, noting that Tesla has already announced such plans.