The use of data analytics has the potential to revolutionise the insurance industry. What are the benefits and risks for consumers?

Big data is transforming how we understand the world. In the case of insurers, this means knowing more about the risks they are being asked to cover.

For example, the use of data analytics with in-car black boxes has enabled motor insurers to reward the good driving of policyholders with lower premiums.

But the industry is also investing heavily in finding other ways it can take advantage of the massive amount of data that we generate and make available through our use of digital devices. When that information is brought together it provides a much clearer view on risk and patterns of behaviour.

Firms will be able to more accurately price their products and deliver a personalised experience to customers, as well as more innovative products.

Individual risk

Some policyholders will benefit a lot, but it is feared others will end up paying extra because insurers will know more about the risk they’re wanting cover for.

It is the danger that this signals a move away from the traditional insurance model of pooled risk towards individual risk that is currently occupying minds in the industry, as well as the consumer watchdog.

The Chartered Insurance Institute has warned that consumers who are deemed high risk could be priced out of insurance altogether, effectively creating groups of ‘uninsurable’ people.

There are also concerns about how customer data is accessed and whether it is appropriate to use information created for a different purpose.

Fraud benefit

However, the industry says the only data it collects is for specific uses, such as providing a more personalised product, understanding and improving customer service or improving its own business performance.

There is also the opportunity for data to tackle fraud within the claims process. This might involve modelling patterns of behaviour typical of fraudsters so it is possible identify suspect claims and have them investigated more thoroughly.

In future, it may speed up the claims process and reduce form filling because much of the information is already available, perhaps from smartphone data.

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