The UK's Financial Conduct Authority (FCA) has signalled its approval of the use of big data in the insurance industry, after it revealed it was dropping plans to launch a full inquiry into the use of the technology in the industry.

The regulator announced a review into the sector last year, stating it was aiming to better understand how the use of big data analytics in areas such as calculating premiums impacted consumers, before deciding on the next steps.

It has now stated that in light of the "broadly positive consumer outcomes" that big data can deliver to the sector, it will not be proceeding with a full market study at the present time, which effectively gives the green light to insurers to implement big data into their decision-making.

However, the regulator did add a note of caution, observing that there are some areas where big data has the potential to harm consumers. Specifically, it noted that as big data changes the extent of risk segmentation, this may lead to categories of customers finding it harder to obtain insurance. 

The FCA also raised concerns about the potential that big data might make it easier for firms to identify opportunities to charge certain customers more.

Director of strategy and competition at the FCA Christopher Woolard noted that as the general insurance sector is a vital part of the economy, affecting millions of consumers, it is essential that it works well.

"There is potential for big data to transform practices across general insurance markets, and some consumers are already seeing benefits but there are also some risks to consumer outcomes," he said.

"While we have decided not to launch a full market study, we are undertaking further work in this area and with the Information Commissioner's Office (ICO) to ensure our rules and policies keep pace with developments in the market, but also do not prevent positive innovations."

The FCA's Call for Input found that although big data is able to improve general consumer outcomes, it can also affect how companies determine their pricing. It suggested that as insurers gather increasing amounts of data from a wider range of sources, and apply sophisticated analytical tools to this, it may lead to the use of reasons other than risk and cost in pricing becoming more common throughout the industry.

While it recognised the potential that consumers who are deemed to be at higher risk may be denied coverage, the review has not shown any signs that this is occurring. "However, the FCA will remain alert to the potential exclusion of higher risk customers and will engage with government if concerns begin to develop because of how firms are using big data," the regulator stated.

The FCA also reminded insurers of their responsibilities to consumers when it comes to ensuring their use of data is in line with security regulations and legislation such as the Data Protection Act. The FCA will be co-hosting a roundtable with the ICO later this year on how data should be used in the general insurance sector.