Bailey: Big Data must not exploit vulnerable consumers

Andrew Bailey FCABig Data’s ability to identify consumers who do not switch to more cost effective products should not be exploited by financial services providers says FCA chief executive Andrew Bailey.

Speaking at the ABI annual conference today, Bailey described the ability to single out and target consumers who do not shop around as an example of one of the unacceptable new uses of the massive amounts of data being harvested today. But the use of telematics in motor insurance is acceptable because it nudges individuals towards better behaviour.

In a wide-ranging debate on the ethical challenges Big Data pose to the insurance industry, Bailey said the jury was still out on how the insurance sector should operate in a future where genetic mapping enables vastly improved accuracy of prediction of longevity and susceptibility to illnesses.

The ABI’s current moratorium on genetics and underwriting, which requires insurers to not treat customers who have an adverse predictive genetic test result less favourably than others without justification, runs until 2019.

Bailey said: “There has been a revolution in our ability to capture and use information in our lives. Big Data does mean that insurers can move the boundary between risk assessment based on aggregate modelled behaviour and risk assessment based on the observed behaviour of the individual. It therefore takes us somewhat away from pooling.

“Access to Big Data can yield a wide range of information. Suppose – as happens – that it allows us to identify people whose behaviour over time shows inertia in the sense that they do not shop around for a better premium. They are not prone to switching. There may be many reasons why a customer chooses to stay with a particular provider, but big data could be used to identify customers more likely to be inert, and insurers could use that information to differentiate pricing between those who shop around and those who do not. The latter pay more and thereby can cross subsidise those who do shop around. There is a choice for society – do we permit this sort of behaviour to go on, or not?

“Our view is that we should not. Why? If you take the argument apart, it is because we think that to do so would be to exploit a feature of individual behaviour that should not be exploited in this way. The reason is either because some of the public act on the basis of ignorance or naivety which should not be exploited, or because some of the consumers involved are more vulnerable, in whatever way, and cannot reasonably be expected to act in a way that prevents the exploitation of the information on their behaviours.

“Let’s suppose that genetic identification really does revolutionise the prediction of life expectancy and each person’s probability of suffering from dementia.

“The implications for life insurance are potentially profound. It goes beyond the scope of my first case – we cannot simply react by changing our lifestyles and then insurers can model a revised distribution of life expectancy. Now, maybe the reaction to improved identification is to say “it is what it is” and we accept the implications for purchasing life insurance. Or, maybe we say that it creates unacceptable divisions within society – outcomes that are not acceptable for society in terms of access to insurance. By the way, I don’t know the answer to this question is obvious. What I do know is that this is a question that needs to be answered by involving Governments rather than solely regulators or firms.”