How is the move towards ‘big data’ from external sources helping insurers price risk in the post-Gender Directive environment?
With the insurance industry losing gender as a rating factor, the quest to find alternative forms of data when underwriting risk has intensified. As well as internal claims and customer data, insurers are pulling in external information on everything from credit history and driving behaviour to property details and shopping patterns.
But the shift towards big data goes beyond replacing gender, with insurers looking at more granular data to gain a competitive edge.
Giles Baxter, UK information systems and change director at RSA, says data now plays a much larger part in insurers’ business models: “A year ago big data was very much in the technologist’s domain, but now it’s firmly on the business agenda. Business awareness of the need to use more data – and to use it more intelligently – has definitely heightened. As a result, data volumes are increasing, with the rate of increase sharpening.”
There are advantages to adopting this data-rich approach to underwriting. In addition to enabling insurers to gain a more accurate picture of risk, it can help validate information and prevent fraud. One example is the move to make DVLA driving offence data available to insurers, especially as the Association of British Insurers estimates as many as 23% of motorists do not accurately declare their driving history.
This change also benefits customers. Jonathan Davey, managing director of SSP brands Pure and Keychoice, explains: “With the DVLA driving offence database and the proposed no-claims discount database, this information can be validated instantly. This means the customer gets an accurate quote without having to chase paperwork.”
In addition, with insurers holding more information on them, customers will be offered tailored products and improved customer service. In the US, consumers searching for a new provider receive quotes based on the cover they have in place – making it easier to make a direct comparison.
While the UK lags behind the US, the appetite for data suggests the gap could be closing. The biggest advance is in motor cover, where an increasing number of insurers are gathering data on driving behaviour via telematics and other forms of technology. Although this technology is primarily used by younger drivers, it is predicted to become increasingly common – with research by Boston Consulting Group suggesting more than 15% of policies sold in 2020 will include telematics technologies.
As well as enabling insurers to price more accurately, this type of data also offers product development opportunities. Baxter explains: “In time, we expect we’ll be able to offer policies that change month by month rather than annually.”
Meanwhile, insurers are pulling in free data, primarily from affinity partners. This information can give an insight into a customer’s behaviour with other products that may be relevant to pricing cover, including data on their loyalty and how they handle credit. “There’s a continual search for additional data to enable greater differentiation of risk,” says Simon Kneller, actuarial director at Covéa Insurance. “Affinity partner data can give an insurer a unique way to segment its customers based on how attractive they are to other companies.”
While it can be advantageous, integrating additional data can be challenging, especially when it comes to infrastructure. “As data volumes increase, insurers need to find ways to warehouse it, which has cost implications,” says Selwyn Fernandes, managing director of LV’s direct business. “On top of this, some insurers are running mainframes that are 20 to 30 years old. These systems really need to be updated to be able to process the data effectively.”
Concerns also remain about the volume of data available to insurers. With information overload potentially slowing the quotation process, insurers have to be careful to pinpoint the most important data.
Adapting to this new data-rich environment could particularly challenge some of the more established insurers. Richard Love, director of customer and growth consulting at Deloitte, believes newer players may be able to gain an advantage: “Adopting more and more data is a big change for the insurance industry and I expect new players to be set up specifically to use data. We’re already seeing this in motor insurance with a handful of new companies coming into the market with pay-as-you-drive products in the past six months.”
However, there is also the cost of the data itself to consider. Kneller explains that, while some is free, when it comes to paid information it’s essential to weigh up cost against value. “The economic assessment is getting easier,” he adds. “Many data providers have changed their business models with the cost of data falling as the number of searches has increased. This is definitely one of the game changers.”
And with the quest for more data sources intensifying, insurers must be aware of the ethical issues that come with it. Fernandes says insurers must act responsibly as they look for data: “There is information we could use today but we choose not to as it could create issues. When we look at data we want to be sure it’s legal and that there’s a clear association with risk. There is a danger of reputational damage if this isn’t handled responsibly.”
Even where data is used responsibly, insurers have to be mindful of consumer reaction. As the amount of data being used increases, consumers may become suspicious about how it is accessed and whether it is even relevant to their cover.
But while insurers are still getting to grips with how data could transform the insurance landscape, and the best ways to take advantage of it, commentators seem certain it is a change that is set to stay. “The insurance industry still has a way to go before big data becomes business as usual, but it’s already becoming a key differentiator,” Love concludes.
“It will become an integral part of the insurance model, helping to drive sales and product development as well as enabling more tailored pricing. It’s a shift towards meeting the customer’s needs, and this is exciting.”
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