Technology firms are most likely to enter the insurance sector as competition for intermediaries but their mining of vast amounts of customer data could limit access for certain customer groups, the Financial Conduct Authority (FCA) is warning.
The points came as the regultor is seeking views on the potential competition benefits and drawbacks of big technology firms such as Google, Amazon or Apple entering the UK insurance sector as intermediaries or as providers of consumer data to underwriters.
The regulator’s discussion paper is seeking views on the potential competition benefits and harms from big tech firms’ entry into a range of retail financial services sectors.
The paper’s launch follows a week in which Amazon launched an online insurance store in the UK.
To kick off the discussion, the FCA has published analysis focusing on the potential competition impacts of such firms entering in four vital retail sectors: payments, deposit taking, consumer credit and insurance.
Competition for advisers
In the section on insurance, the FCA identifies two plausible entry strategies for Big Tech.
The first is as an intermediary – this includes marketplaces such as price comparison websites (PCWs) and brokers, while the second is as a provider of data or business services, for example as a provider of consumer data to underwriters.
The FCA said in the short term and maybe enduring longer, entry in the insurance sector, particularly as an intermediary either broker or marketplace, could lead to beneficial changes of the value chain through:
- Access to predictive technologies, with likely positive spill over effects on incumbent insurance providers.
- Creation of new origination channels for newer forms of insurance such as on-demand insurance, which is where consumers only purchase insurance when it is required, for example by the mile car insurance.
- It could also lower search and switching costs, increasing competitive pressure on existing providers.
Data use to restrict access
But in the long term, the FCA added competition risks may emerge if the market evolved such that data gathered by big technology firms is negatively used in insurance underwriting, therefore impacting access to insurance for specific cohorts of consumers, eg as the ‘pooling’ of risks is eroded.
It warned this risk would be heightened if these firms have access and use data from their wider businesses, putting incumbents and potential entrants at a disadvantage, to the detriment of competition and consumers.
According to the FCA, it identified direct entry, where tech firms would be responsible for underwriting and executing insurance contracts, as a less likely entry strategy in the short term.
Even though these firms have access to a large amount of capital, underwriting insurance contracts would involve further regulatory and underwriting risks reducing the overall value of entry to their ecosystem, it added.
The FCA made clear that no regulatory changes are being proposed at this stage, and the FCA’s paper aims to stimulate discussion to inform its regulatory approach to big technology firms as part of the new UK pro-competitive regime for digital markets.
Sheldon Mills, executive director of consumers and competition at the FCA, (pictured) said: “In recent years, big tech’s entry into financial services, in the UK and elsewhere, has demonstrated their potential to disrupt established markets, drive innovation and reduce costs for consumers.
“Across the world, we’ve seen the capability of big tech to offer transformative new products in areas such as payments, deposits and consumer credit.
“We want to make sure that these benefits are fully realised while, at the same time, ensuring good consumer and market outcomes. This is vital when we consider the role of Big Tech firms in the provision of key technological infrastructure like cloud services.
“The discussion we are starting today will inform the FCA’s pro-competitive approach to digital markets, and I encourage consumers, firms and fellow regulators to join the conversation.”