Should insurers embrace Big Tech or brace for Big Tech revolution?

Update: On 12 July 2023, the FCA published a feedback statement to its discussion paper on the potential competition impacts of Big Tech entry and expansion in retail financial services. Respondents from the insurance sector suggested that access to a range of user data could enable Big Tech firms to make more precise risk assessments using highly sophisticated predictive technologies. Some respondents also argued that the underlying technologies employed by Big Tech firms create complementarities alongside new entry strategies and business models. The FCA will continue to monitor this issue and engage with the Government, with a particular focus on the Digital Markets, Competition and Consumers Bill.

The increasing presence of Big Tech in financial services has resulted in a rapid response from the UK’s legislative and regulatory bodies. This is largely driven by the UK Government’s stated desire to develop a pro-competition regime for digital markets.  

Big Tech refers to the most influential multinational companies that specialise in technology. Here, we look at how the government and regulators (namely the Financial Conduct Authority (FCA) and the Competition Markets Authority (CMA) have been responding to the rise of these tech giants and offer our views on how to navigate the increasing competitive pressures. 

Regulatory developments 

Regulators in the UK are cracking down on Big Tech dominance. Following the government’s announcement unveiling its plans to increase competition in UK digital economy in July 2021, the CMA created the Digital Markets Unit (DMU). This new unit will supervise a new regulatory framework for dominant digital companies, encouraging healthier competition practices and innovation, as well as safeguarding consumers and businesses from anti-competitive behaviour.  

The FCA is also aligning its activities with the government’s competition and consumer protection focussed agenda. In October 2022, the regulator published a discussion paper (DP22/5) on the potential impacts of Big Tech’s expansion into financial services. The paper aimed to stimulate discussion on how to achieve a fair balance between the benefits and risks that Big Tech could create in four different retail sectors – payments, deposit taking, consumer credit and insurance.  

Possible Big Tech entry scenarios in the insurance sector 

The FCA has identified three potential Big Tech entry scenarios in the insurance sector in its discussion paper: 

Scenario 1: Entry as an intermediary  

A Big Tech company acting as a bridge between underwriters or insurers and their customers, either as a broker or marketplace. For example, Big Tech companies could enter the insurance market by facilitating price comparison websites (PCWs) or offering policies that are underwritten by incumbent insurers. 

Scenario 2: Entry as a provider of third-party data or business services  

A Big Tech company selling data or technology solutions to underwriters or insurers. 

Scenario 3: Entry as a direct insurer  

Traditional insurers are taken out of the equation entirely as Big Tech firms underwrite and manage their own insurance contracts. 

The first two scenarios are symbiotic in nature – both parties benefit from partnering with each other. These have been labelled as ‘plausible’ by the FCA, and we have already observed them in the UK. The third scenario has been identified as ‘unlikely in the short to medium term’. This is because, even though Big Tech firms have access to a large amount of capital, underwriting insurance contracts would involve significant risks that would reduce the overall value of entry. When their competitive advantages lay elsewhere, Big Tech companies have no reason to subject themselves to excessive risks, capital constraints, or regulations. Consumers' awareness of the premiums they pay, and margin pressures faced by insurers may further discourage direct entry by Big Tech.  

Should insurers embrace Big Tech or brace for Big Tech revolution?  

The answer is both.  

At present, there are only two Big Tech firms with FCA permissions to provide products and services in insurance – and their activities fall under scenario one, outlined above. As such, Big Tech companies are unlikely to be able to underwrite insurance contracts soon. However, partnership-based models described in scenarios one and two will likely gather pace.  

Big Tech expansion into financial services could potentially result in improved access to data and predictive and analytical technologies, as well as cost-effective systems that can write and execute insurance contracts. This means that insurers might want to consider the possibility of partnering with a Big Tech firm. 

However, the benefits of collaboration between Big Tech companies and insurers could be eroded if the former can create and exploit entrenched market power. If insurers become too reliant on Big Tech’s databases, tech giants could use this to their advantage and charge high prices to insurers, thereby creating margin squeeze.  

Thinking long-term 

Insurers should not put the FCA’s third scenario on the back burner either. Big Tech companies are experts in identifying market and regulatory gaps and tend to enter new sectors in a rapid and unpredictable manner. 

Although the FCA is not proposing any regulatory changes at this stage, the mere fact that it is consulting on this topic means that it is only a matter of time before insurers must consider how Big Tech might impact their operations.  

The growing importance of data-driven innovation gives Big Tech companies a competitive advantage. Collecting data is of paramount importance to insurers, as it enables more effective risk assessments and can assist with developing better pricing strategies – and tech giants have plenty of data to spare.  

The amount of data that Big Tech firms collect through their own products simply cannot be matched by traditional insurers. It is therefore more than plausible that, at some point in the not too distant future (some sources predict as early as 2024), tech giants might want to explore the possibility of bringing all underwriting and insurance activities in-house – especially given that consumers’ appetite for their solutions is growing. Inevitably, this would disturb the market and require insurers to revise their business models. 

Motor insurance, home insurance and health insurance might be the first to witness Big Tech’s direct entry in insurance. These industries have already been impacted by the development and adoption of technology, as evidenced by the popularity of products such as dash cams, smart home solutions and wearables.

Comment

It is not possible to accurately predict how or when Big Tech will expand into insurance. However, what is certain is that tech giants are already using their resources and lobbying experience to ensure any future regulation suits their business objectives.

As such, insurers should also consider engaging with the government and regulators on this topic - this will naturally increase their level of preparedness, and their expertise and insights will be invaluable when creating a new regulatory landscape.

To stay ahead of the curve, we recommend that insurers continue to adopt an innovation-centred approach to all their business activities, which could include partnering with a Big Tech firm. Combining efforts on the data front could be a viable option, as insurers can provide a unique and valuable insight into the volume and categories of claims. This being said, any collaboration between tech giants and insurers must be consumer-focused and will require the former to learn to speak the language of insurance.

Related item: Maturity framework needed to guide safe and responsible use of AI by financial services industry