By
Professor Michael Mainelli
Published by CoinDesk (December 2015).
[an edited version of this article appeared as Why Insurers Caught The Blockchain Bug In 2015 in CoinDesk (December 2015)]
Logically Central, Technically Distributed: Mutual Distributed Ledgers (aka blockchain technology) In Wholesale Insurance
Do I Like TOM?
In April 2015, Lloyd’s of London launched a Target Operating Model (TOM) project. TOM is a central body responsible for delivering modernisation to the still heavily paper-based wholesale insurance transactions in the London Insurance Markets. You can state ‘I Support TOM’ on a registration site, or ‘like’ TOM on social media. There have been several ‘innovation’ events. There is an orange logo reminiscent of the 1990’s when ‘orange was the new black’. The project has even tried to coin yet-another-tech-mashup for the London insurance markets surrounding Lloyd’s, ‘InsTech’.
This is not the first time that the London insurance markets have tried to modernise. The London Markets are serial reformers with varying degrees of success from total failure to middling impact. Limnet made progress with electronic data interchange in the 1980s and early 1990s. Electronic Placement Support (EPS) worked in the late 1990s, but few used it. Kinnect, at a cost conservatively quoted as £70M, was abandoned in 2006. Project Darwin, 2011 to 2013, achieved little. The Message Exchange Limited (TMEL) is a messaging hub for ACORD messages that has had modest success, but most people still use email. Numerous private exchanges or electronic messaging ventures have gained only partial market shares. Xchanging Ins-Sure Services (XIS) claims and premiums processing joint venture was formed in 2000 and runs adequately, but there is still a lot of paper. A swift walk round Lloyd’s, perhaps passing by the famous Lamb pub in Leadenhall Market, reveals a lot of heavy paper lengthening the arms of long-term insurers.
Does Ontogeny Recapitulate Phylogeny?
So is TOM’s future equally bleak? Possibly not. Ernst Haeckel (1834–1919) was a German biologist and philosopher who proposed a now largely discredited biological hypothesis, the “theory of recapitulation”. He proposed that in developing from embryo to adult, animals go through stages resembling or representing successive stages in the evolution of their remote ancestors. His catchphrase was “ontogeny recapitulates phylogeny”. TOM seems to be going through all the previous stages of former wholesale insurance modernisation projects, databases, networks, messaging centres, but may come out at the end to realise the potential of mutual distributed ledgers (aka blockchain technology). Information technology systems may have now evolved to meet the demanding requirements of wholesale insurance.
Wholesale insurance differs from capital market finance in some important ways. First, insurance is a ‘promise to pay in future’, not an asset transfer today. Second, while capital markets trade on information asymmetry, insurance is theoretically a market of perfect information and symmetry, you have to reveal everything of possible relevance to your insurer, but each of you has different exposure positions and interpretations of risk. Third, wholesale insurance is ‘bespoke’. You can’t give your insurance cover to someone else. These three points lead to a complex set of interactions among numerous parties. Clients, brokers, underwriters, claims assessors, valuation experts, legal firms, actuaries, and accountants all have a part in writing a policy, let alone handling subsequent claims.
People from the capital markets who believe insurance should become a traded market miss some key points. Let’s examine two, one about market structure and one about technology. People use trusted third parties in many roles in finance, for settlement, as custodians, as payment providers, as poolers of risk. Trusted third parties perform three roles:
The hundreds of firms in the London Markets are rightly concerned about a central third party who might hold their information to ransom. The London Markets want to avoid natural monopolies, particularly as agreed information is crucial over multi-year contracts. They are concerned about a central third party that must be used for messaging, because without choice the natural monopoly rents might become excessive. Many of the historic reforms failed to propose technology that recognised this market structure.
Mutual distributed ledgers (MDLs) provide pervasive, persistent, and permanent records. MDL technology securely stores transaction records in multiple locations with no central ownership. MDLs allow groups of people to validate, record, and track transactions across a network of decentralised computer systems with varying degrees of control of the ledger. Everyone shares the ledger. The ledger itself is a distributed data structure held in part or in its entirety by each participating computer system. Trust in safeguarding and preservation moves from a central third-party to the technology. Emerging techniques, such as, smart contracts and decentralised autonomous organisations, might in future also permit MDLs to act as automated agents.
Beat The TOM-TOM
Because MDLs enable organisations to work together on common data they exhibit a paradox. MDLs are logically central, but technically distributed. They act as if they are central databases where everyone shares the same information. However, the information is distributed across multiple, or multitudinous, sites so that no one person can gain control over the value of the information. Everyone has a copy. Everyone can recreate the entire market from someone else’s copy. However, everyone can only ‘see’ what their cryptographic keys permit them.
How do we know this works? Z/Yen has built several insurance application prototypes for clients who seek examples such as motor, small business, and insurance deal-rooms. The technical success of blockchain technologies in cryptocurrencies, such as Bitcoin, Ethereum, or Ripple, have shown that complex multi-party transactions are possible using MDLs. We have build a system that handles ACORD messages with no need for ‘messaging’.
While not new, Z/Yen’s work in this space dates from 1995, until recently financial services people dismissed MDLs as too complex and insecure. The mania around cryptocurrencies has led to a reappraisal of their potential as blockchains are just one form of MDL. That said, MDLs are ‘mutual’. A number of people need to move ahead together. Further, traditional commercial models of controlling and licensing intellectual property are less likely to be successful at the core of the market. The intellectual property needs to be shared.
A message is getting out on the jungle drums that MDLs, while not easy, do work at a time when people are rethinking the future of wholesale insurance. If TOM helps push people to work together, perhaps this time market reform will embrace a generation of technology that will finally meet the demands of a difficult, yet essential and successful, centuries-old market. Perhaps TOM should be beating the MDL drums more loudly.
PostScript: In Spring 2025, writing in The Quill, the newsletter of the The Three Rooms Club, Roger Foord wrote:
"But since LIMNET (The London Insurance Market Electronic Network) was introduced around 1985, and all parties in the market had to agree any new ideas, the actual innovations of any consequence have been few and far between and at an eye watering cost. Whether brokers and underwriters actually have been kept awake worrying about this situation is debatable but each CEO of Lloyd’s since 31st December 1999, when the world thought technology would bring our whole world down with dodgy ‘chips’ the long list of expensive failures is an embarrassment.
To be fair the whole market, Lloyd’s and Company market, plans for an electronic marketplace started in the mid 1990’s with ‘EPS’ – Electronic Placing Support’. It never happened. From then on, each Lloyd’s CEO seemed determined to put their name to something which was destined for failure, such that many were remembered for their IT failure rather than their success with underwriting results. Nick Prettejohn, Lloyd’s CEO early this century, oversaw the ‘magnificent’ failure that was Kinnect which had followed on from Lloyds.com and Blue Mountain. He had also, in conjunction with the Company market decided that a big cost saving would be to outsource the Central Bureau (LPSO and LIRMA) to a private company, Xchanging, who were promising to plough millions into a rewrite of the central software. I’m not sure that took place too successfully which is why we have BP2 now (see later). Moving on Richard Ward, CEO, presided over a successful market but also had some unsuccessful technology solutions which ‘came but never went’! Boston/Darwin/Vision 2025 and the idea that the laptop would rule the Lloyd’s floor.
Inga Beale introduced ‘TOM – Target Operating Model’ which never actually happened but gave rise to the current effort, introduced by the about to leave CEO – John Neal. BP2, if you don’t know and why should you, is supposed to replace the forty year old central accounting system, while also offering the Lloyd’s market users a digitalised future. This particular egg is now in its fifth year of gestation and there is still no sign of a leg sticking out of the shell. The fact that like the tide nothing can stop technology the recent and unstoppable increase in AI and its thirst for data has meant that waiting for BP2 has resulted in impatience and the Lloyd’s market innovators are ‘doing their own thing’ rather than wait for Velonetic’s Godot!
Well that is the story so far – many failed initiatives, many wasted hours of meetings , bodies of technology gurus lying around the Lutine Bell and most frightening of all a probable cost since millennium day, of £1.5 billion and still rising. Edward Lloyd would be rolling in his cappuccino."