Big data opens new horizons for insurersFirms must learn to mine gems of information buried under mountains of data

Brendan McCabe, Head of Insurance Coverage, HSBC

Big data is transforming the insurance industry, presenting difficult management challenges but also rich opportunities to reduce risk, optimise pricing and customise services.

Insurers have always depended on their capacity to master statistics. Traditional datasets on demographics, longevity, crime, natural disasters and so on may be huge but they are structured. Big data, for the most part, is not. Social media posts, mobile communications, online searches and real-time signals from billions of internet-connected devices do not yield up their secrets readily to a spreadsheet. Teasing out patterns from oceans of high-volume, high-velocity and high-variety information is tough. Companies that succeed will be better able to streamline claims operations and detect fraud. Perhaps most importantly, more-detailed consumer profiles will help them fend off competition from non-insurers by improving customer targeting and service.

Big data is growing fast – at 40% a year in the US on one estimatei - as business wakes up to its potential. The Organisation for Economic Co-operation and Development reckons data-driven innovation can increase productivity by 5% to 10%ii. McKinsey Global Institute estimates that US health-care costs could fall by 8%iii. In the insurance sector, one firm that recently built a big data platform says it can now support the reporting and analytical needs of nearly as four times as many staffiv. Today’s car – a computer on wheelsThe spread of telematics – data sent from recorders fitted in vehicles - is a good example of how insurers are harnessing big data. In the past, the premium would reflect a driver’s age and gender, type of car, post code and claims history – information too broad to predict how much risk the insurer is really running. Now, data transmitted from the car or truck enable insurers to distinguish a cautious driver from one who brakes and corners hardv.

This Usage Based Insurance (UBI) gives companies a powerful tool to match the rate charged to the actual risk incurred. An obvious danger for insurers slow to adopt UBI is that they will be saddled with less-safe drivers whom its rivals have been able to identify and reject.

Change is afoot in other sectors as ever more people and things are connected to the Internet. Biometric data sent through wearable fitness devices will enable doctors and insurers to spot medical problems early. Home insurers can draw on real-time information from arrays of in-house sensors and smart meters. Big data transmitted from machine to machine (M2M) may render some commercial insurance business models obsolete by giving insurers deep insight into how factories operate their equipment.

The capacity to calculate risk more accurately will help insurers to minimise the risk-based capital they will need to hold under the looming Solvency II directive. Collating big data should in principle also assist them in meeting requirements under Pillar III of the directive for more frequent, extensive reportingvi. However, survey evidence shows many firms losing the race to overcome the related data and IT challenges in time to implement Solvency II by the 1 January 2016 deadlinevii.

A snooper’s charter?Access to masses of personal data plainly raises pressing privacy issues. In a 2014 survey, only 27% of people across 15 countries were willing to trade their privacy for the convenience of easier access to informationviii. Alert to these concerns, the European Union is proposing data-protection rules that would let policyholders demand the removal of their information from insurers’ databases. What’s more, the head of the Association of British Insurers has warned of a regulatory crackdown if the use of big data results in higher premiums for riskier customers, effectively making insurance unaffordable for some peopleix.

Data security is an equally sensitive issue following high-profile hacking attacks and information leaks. The legal question of who owns data is also emotive: does the information from a car’s decoder belong to the driver, the insurer or the auto manufacturer? And the inappropriate use of data is a serious business risk, as companies worldwide periodically discover to their cost.

Insurers have been criticised even within the industry for having been slow to make use of big datax. However, firms are picking up the pace. The Progressive Corp., a big Ohio-based car insurer, wrote more than $2 billion in UBI-based auto insurance in 2013 out of total premiums of $17 billionxi. The technical complexity of operating big data-based systems is daunting: Progressive captures data from more than 9 billion driving miles at one-second intervals. It is an open question whether smaller insurers will have the resources to develop proprietary systems. If not, big data may prove to be a catalyst for consolidation.

Breaking down the silosRegardless of whether it is handled internally or outsourced to specialist boutiques, big data requires top-notch analysts to pick out the signal from the noise in huge data plumes. But the main challenge, according to 60% of respondents to an EIU survey of executives, is to overturn the silo mentality of insurers that prevents the capture and application of big data across different business linesxii.

A failure to adapt will expose the industry to increased competition from Internet and e-commerce companies that have been quicker to exploit big data. The threat is not theoretical. Google has bought a UK website that offers personal finance products including insurancexiii and is reportedly plotting a move into auto insurance in the USxiv. Change is uncomfortable, but doing nothing is not an option for insurers: big data guarantees disruption come what may. The sooner companies embrace big data, the greater their chance of cementing brand loyalty and stealing a march on their competitors.

i http://www.idc.com/research/viewtoc.jsp?containerId=233485ii http://www.oecd.org/sti/inno/data-driven-innovation-interim-synthesis.pdf, p18iii http://www.mckinsey.com/insights/business_technology/big_data_the_next_frontier_for_innovationiv http://www.dataiq.co.uk/news/20140820/zenith-insurance-boosts-performance-big-data-platformv http://www.naic.org/cipr_topics/topic_usage_based_insurance.htmvi http://www.invoke-software.com/banking-insurance/solutions/solvency2-regulatory-reporting/white-paper?gclid=CNStkKC94cMCFQkcwwodpqQAjgvii http://www.ey.com/GL/en/Industries/Financial-Services/Insurance/EY-european-solvency-ii-survey-2014?gclid=CK_srti-4cMCFUKr2wodfUEA9Aviii http://www.emc.com/campaign/privacy-index/index.htmix http://www.ft.com/cms/s/0/08f6049c-a7cd-11e4-8e78-00144feab7de.html?ftcamp=crm/email/201522/nbe/CompaniesBySector/product&siteedition=uk#axz

z3QmZAW4SD x http://www.computing.co.uk/ctg/news/2360744/insurance-industry-behind-on-harnessing-big-dataxi http://media.corporate-ir.net/media_files/irol/81/81824/arInter/13_annual/assets/pdf/Progressive-2013-AR-BW.pdfxii http://www.uk.capgemini.com/resources/the-deciding-factor-big-data-decision-makingxiii http://www.insuranceage.co.uk/insurance-age/news/2032047/google-buys-uk-aggregator-beatthatquotecomxiv http://blogs.wsj.com/digits/2015/01/08/google-wants-to-sell-you-auto-insurance/