A radical change in insurance regulation is underway

The Chartered Insurance Institute has recently published a paper by me, entitled ‘The Digital Panopticon and the New Power of Data’. It looks at a radical shift in how insurance markets are going to be regulated. It’s worth a read, even if I say so myself!

Here’s a summary of the paper – you can find the full version here.

We know that ‘big data’ is starting to transform the way in which the insurance sector engages with consumers. The result will be new products and services that promise a more personalised, customer centric way of doing business. Yet this also means that insurers will gain access to unprecedented levels of information about our lives. Our everyday activities will be tracked and recorded like never before. We are moving towards a world in which we are constantly being monitored in some way.

The Panopticon

This begins to resemble an idea put forward by the 18th century reformer Jeremy Bentham. He envisaged a prison designed in the form of a ring, with a central tower from which prisoners could be monitored at all times, but in which those monitoring remained unseen. He called it the Panopticon. The key feature of Bentham’s design was that the monitoring was so constant, yet so unknowing, that the prisoners would be forced into more conforming behaviour.

Let’s think of a modern day Panopticon, filled not with prisoners, but with millions of consumers, with the central tower full of firms gathering data about us. Data about our everyday activities would stream into that central tower, to be turned by the firms there into personalised products and services. A ‘digital Panopticon’.

Insurers are one such class of firm taking up position in that central tower. Underwriting and claims people would feed upon all that consumer data, looking for patterns of behaviour that signal a good or bad risk, an honest or dishonest claimant.

A New Era of Regulation

Then there’s the Financial Conduct Authority, talking about a new era of regulation based upon a combination of data, technology and behavioural science. They illustrated this in a recent review of the pay-day loan sector, drawing in vast amounts of loan data from firms, to produce new rules on lending and servicing practice.

Insurance could be next on the FCA’s list, given its track record of mis-selling. Will the FCA start drawing in vast amounts of insurer data to analyse it for signs of consumer detriment? If so, does this mean the regulator is now constructing an observation tower of its own inside that ‘Digital Panopticon’, one that sits within the insurance market’s own tower?

Such a ‘tower within a tower’ could be a game changing move. It could bring about a radical change in market attitudes towards ethics, fairness and culture. After all, the idea behind the Panopticon was for it to bring out better, more universal behaviour, on the basis that what you were doing at any time might be under observation. Is the real future of regulation then simply the power derived from being in that inner tower, using data to watch over a firm that could be yours, a person that could be you?

A Revolution in Trust

And if firms use predictive analytics to anticipate policyholder behaviour, then could the regulator use its own predictive analytics to identify emerging patterns of misconduct? A regulator able to address misconduct before it became widespread would be powerful as well as controversial.

This could bring about a revolution in trust, for might consumer concerns about their personal data fall away, knowing that regulators are able to see everything insurers are doing with it?

The original Panopticon proved too radical and was never built. Yet something very similar is taking shape in the digital insurance market. The key question is: is the insurance market and its regulators ready for the consequences that will flow from this?