Sunday, 4 December 2016

Big data and loyalty to your insurer could raise your insurance premiums

Back in September, I wrote a post about how the most loyal customers are the ones that firms should charge higher prices to, based on this Wall Street Journal article. Last week, the Telegraph had a similar article:
The financial regulator has warned that insurance companies could start charging higher premiums to customers who are less likely to switch by using “big data”.
In a speech to the Association of British Insurers, Andrew Bailey, chief executive of the Financial Conduct Authority, suggested that big data could be used to “identify customers more likely to be inert” and insurers could use the information to “differentiate pricing between those who shop around and those who do not.”...
James Daley, founder of Fairer Finance, the consumer group, said that to some degree big data was already being used to punish inert customers.
He said: “Insurers already know how their own customers are behaving. Those who don’t switch are penalised for their loyalty with higher premiums. Inert customers will be priced partly on risk and partly on what the insurer can get away with.”
To recap, these insurers are engaging in price discrimination -  where firms charge different prices to different customers for the same product or service, and where the price differences don't reflect differences in cost. There are three necessary conditions for effective price discrimination:
  1. Different groups of customers (a group could be made up of one individual) who have different price elasticities of demand (different sensitivity to price changes);
  2. You need to be able to deduce which customers belong to which groups (so that they get charged the correct price); and
  3. No transfers between the groups (since you don't want the low-price group re-selling to the high-price group).
 As I noted in my previous post in September:
If you are an insurance company, you want to charge the customers who are most price sensitive a lower price. If customer loyalty is associated with customers who don't shop around, then customer loyalty is also associated with customers who are less price sensitive. Meaning that you want to charge those loyal customers a higher price.
What about big data? The Telegraph article notes:
Earlier this month Admiral, the insurer, announced that it planned to use Facebook status updates and “likes” to help establish which customers were safe drivers and therefore entitled to a discount.
Campaigners called the proposal it intrusive and the social media giant then blocked Admiral’s technology just hours before it was due to launch.
Just last week a telematics provider, Octo, launched an app that that shares customers' driving data with insurers so that they could bid for custom. It claimed that the safest drivers would get the lowest premiums.
The problem here is that opting out of having your social media profiles available for your insurer to peruse may be an option, but it would also provide a signal to the insurer. Who is most likely to refuse? The high-risk insured, of course. So, anyone who refuses will likely face higher premiums because of the signal they are providing to their insurer. Again, this is a point I made a couple of months ago.

It seems that we will have to accept the reality that big data, and especially our 'private' social media and activity data, is simply going to determine our insurance premiums in future.

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