Why being loyal is a bad idea
Could New Zealand insurers be using our shopping habits, credit records and social media posts to hike the cost of our insurance premiums?
If you had access to my "big data", you might discover some very uninteresting things about me. Things I really don't care much about revealing.
If loyalty cards could speak you'd find I'm more likely to buy Kombucha at Fresh Choice, than Fanta at Pak'nSave. The banks would tell you I've never changed my account or credit card in 25 years. My credit record would show a hire-purchase for a fridge in 1993.
If I had any social media, it would uncover my pocket money being spent on pricey bikes and matchy jerseys, bib shorts and socks. Call centre data would reveal the late-night phoner who has realised the house will be uninsured come morning, so I better pull my finger out and pay the bill.
What does this motley collection of observations paint a picture of?
Apparently I'd come up as a financially un-savvy consumer, who doesn't shop around much. And I'm very likely to be labelled cash-rich and time-poor.
So what? I get the bills paid and buy stuff I want. I don't judge anyone on their choices and expect the same etiquette in return.
But what if I was being judged?
What if my data was being used to hike my insurance premiums? Yeah, that's going to make me grumpy.
Well it is exactly what one major newspaper investigation in the UK has uncovered. Those with a record of never switching banks or electricity suppliers and who make evening calls are ripe to be ripped-off. The time-poor, lazy or elderly, get sent a renewal notice with a higher premium. If their data footprint shows a savvy switcher or a cost-conscious shopper, they're more likely to get a competitive renewal.
The loyal are funding the potentially disloyal.
My own New Zealand policy claims to have a built in loyalty discount. I should jolly well hope so, having been with them 15 years. Yet the discount isn't specified in monetary terms. It's just part of a black box package calculation.
We have no idea if New Zealand insurers are up to the same antics and it's probably a good idea for the Financial Markets Authority to take a look.
What is clear is they are certainly being advised about big data by big accountancy firms such as KPMG and PricewaterhouseCoopers. They refer to it as one of the biggest "disruptors" of the industry.
Big data is not necessarily bad data. In many circumstances it can be used to risk-profile a person to a more granular level. It can then be argued consumers are paying more accurate premiums and not cross-subsidising each other. Even this practice needs careful monitoring as it exposes the moral hazard of those who are higher risk to an affordability problem.
The Australian Institute of Actuaries raises this as a role for government to intervene in.
Price hagglers win
Using big data against those who are not pro-active price hagglers is an entirely different concept. Should it be legal to increase the price of a policy, because someone buys Kombucha not Fanta and seems wealthier?
Or because they're loyal, time-poor or elderly and don't like changing firms?
In the UK, the Financial Conduct Authority (FCA) is investigating the matter and has told the insurance industry it could lead to unfair outcomes, especially if a customer is vulnerable. It also believes "if competition is working well in a market, it should not overly disadvantage existing customers over new ones".
The UK market is hugely competitive with deep price-comparison websites, yet the practice is still happening. New data protection laws hit last month and even these are seen as fairly ineffective. How many times have you pushed the "I agree" button lately? We need to opt-in and agree to whatever privacy terms are dictated, in order to get access to the services or apps we want.
In the UK, a newspaper campaign has successfully lobbied the industry into including the monetary value of last year's premium on renewal notices, so consumers can clearly see any increases. This is a level of transparency we don't have in New Zealand. Some insurers may do it, but I know mine doesn't.
We'd be fools to think our own insurers are not thinking about big data, if not using it already. They may well be proceeding responsibly and carefully, but it doesn't mean questions shouldn't be asked and reassurance sought by regulators.
In the meantime it would pay to strut around the internet switching providers, using comparison sites, buying Pams and deleting pictures of fast cars and expensive holidays off your social media.
Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.