Big Data in the Insurance Industry: Leeway and Limits for Individualising Insurance Contracts

Abstract

With the advent of big data analytics, the individualisation of mass market insurance policies has become commercially attractive. While this development would have positive economic effects, it could also undermine the principle of solidarity in insurance. This paper aims to outline the different regulatory approaches currently in place for dealing with this fundamental challenge by analysing the insurance, anti-discrimination and data protection laws of Switzerland and the U.S./California pertaining to health, renters and automobile insurance. It will be shown that the leeway for individualising insurance contracts is vanishingly small for (mandatory) health insurance on both sides of the Atlantic. By contrast, the two legal systems pursue different regulatory approaches with regard to the other two types of insurance. Renters and automobile insurance are predominantly governed by the freedom of contract principle in Switzerland, whereas in California sector specific regulations significantly limit the informational basis of insurance companies, thereby limiting the leeway for individualisation to a large extent. While Swiss anti-discrimination law hardly restricts the individualisation of insurance contracts, U.S. and California law prohibit such individualisation based on protected characteristics, in this way further restricting the remaining leeway. While privacy laws in the U.S. and California set some significant but rather specific limits for the individualisation of insurance contracts based on the use of personal data, the all-encompassing Swiss (and European) data protection law is clearly the most important barrier to individualisation in Switzerland. Namely, it remains unclear whether the processing of personal data for the purpose of individualising insurance contracts may be based on the legitimate interests of the insurer. As a consequence, insurance companies are advised to always obtain their customers’ consent for making individual offers based on big data analytics. The authors conclude that instead of indirectly hindering the individualisation of insurance contracts through data protection law, Swiss (and European) lawmakers should initiate a dialogue involving all stakeholders to determine which sectors of insurance should be dominated by the principle of solidarity and in which sectors and on what informational basis the individualisation of insurance contracts should be allowed.