A radical shift is underway in how insurance markets are going to be regulated in the UK. The shift will transform the relationship between insurers, regulators and the public.
"Big data" promises a more personalized, customer-centric way of doing business. Yet, as insurers gain access to unprecedented levels of information about the lives of consumers, there could be problems with privacy.
This ability to track everyday lives 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 idea underpinning Bentham’s design was that the monitoring would be so constant, yet so unknowing, that the prisoners would adopt more conforming behaviors.
Let’s think of a modern day panopticon, the ring filled not with prisoners but with millions of consumers, and a 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 personalized 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 analyze all that consumer data, looking for patterns of behavior that signal a good or bad risk, an honest or dishonest claimant.
Then there's the UK regulator, the Financial Conduct Authority (FCA), talking about a new era of regulation based on a combination of data, technology and behavioral science. The FCA illustrated this new era in a recent review of the pay-day loan sector, drawing in vast amounts of loan data from firms and analyzing it to produce new rules on lending and servicing practice.
Insurance could be next on the FCA's list. Might the FCA start drawing in vast amounts of insurer data to analyze 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? Are we seeing the emergence of "panoptic regulation"?
Such a "tower within a tower" could be a game-changing move. It could bring about a radical change in market attitudes toward ethics, fairness and culture. After all, the key idea behind the panopticon was for it to bring out better, more universal behavior, 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 innermost tower, using data to watch over a firm that could be yours, to watch over a person who could be you?
And if firms use predictive analytics to anticipate policyholder behavior, 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 for the time 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?
To explore the concept of panoptic regulation in more detail, read this paper I wrote for the Chartered Insurance Institute earlier this year.
