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March 03, 2021 Did You Know?

Insurtech Concepts: Big Data

By Christine Spinella Davis

This article is the second in a series discussing insurtech and its impact on commercial and personal insurance programs and risk management analysis. We previously discussed how insurtech consists of technology-enabled innovations and disruptions in all aspects of the insurance value chain – including marketing, distribution, product design, underwriting, claims, and balance-sheet management. This piece focuses on the field known as “big data.” This article describes what big data is and its impact on the insurance industry and consumers.

Big Data Is “the DNA of the 21st Century”

Big data has been called the “DNA of the 21st century connected organization.” The field consists of data sets utilizing software that incorporates data mining, data storage, data sharing, and data visualization. This data revolution has allowed for the collection and storage of massive and diverse amounts of information. Big data contains greater variety, arriving in increasing volumes and with ever-higher velocity, than traditional data processing. Wikipedia describes big data as “a field that treats ways to analyze, systematically extract data from, or otherwise deal with data sets that are too large or complex to be dealt with by traditional data-processing application software.” See https://en.wikipedia.org/wiki/Big_data. Specific examples of big data technologies include social media, cloud applications, and machine sensor data.

Benefits of the Insurance Industries’ Use of Big Data

Insurance companies have been able to utilize big data to improve and streamline the risk management process. Insurance companies use predictive analytics to forecast future events and more accurately underwrite price risk and incentivize risk reduction. Big data enriches customer experiences by assisting insurance companies with quickly resolving service issues. Big data also improves marketing effectiveness by tailoring products to individual customer preferences. Likewise, it can create operating efficiencies by streamlining the insurance application process. Insurance companies can use big data to apply algorithms to outcomes to facilitate better claims processing; they can even use it to reduce fraud with better identification techniques. The use of big data by insurance companies also can help those companies improve insolvency through better assessment of risk.

Drawbacks to the Use of Big Data

Although the insurance industry can benefit from the use of big data, potential negative impacts exist, including for the consumer. First, the insurance companies’ use of big data may collide with outdated regulatory structures currently in place, which often take time and significant effort to change. As for the consumer, with the increased use of big data, insurance companies’ risk analysis may lack transparency, which may create the potential for bias in algorithms used to synthesize the data. The more individualized rates that will be available will cause some to lose the benefit of current risk pooling. The ability to collect private and sensitive information and place it in the public realm may be cause for concern and may increase the potential for cyber threats.

Big data has revolutionized the insurance industry, particularly in risk analysis, and will continue to do so. Concerns exist for potential misuse of big data, but regulators and insurance companies will need to work together to develop and enforce protocols and regulations for its safe and fair use as this field and the technologies continue to develop.

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By Christine Spinella Davis

Christine Spinella Davis is an attorney in the Washington, D.C. office of Bradley Arant Boult Cummings, LLP, where her practice focuses on insurance recovery. Christine is the current Editor in Chief of TortSource and a member of the TIPS Council. She is also a former Editor in Chief of the TIPS Law Journal and a former chair of the Section’s Business Litigation Committee. Christine can be reached at [email protected].