In April 2015, Lloyd’s of London launched the Target Operating Model (TOM) project. TOM is a central body responsible for delivering modernization 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 you can "like" TOM on social media. The project has had several "innovation" events. It has an orange logo reminiscent of the 1990s, when orange was the new black. The project has even tried to coin yet another tech mashup term for the London insurance markets surrounding Lloyd’s: InsTech.
This is not the first time the London insurance markets have tried to modernize. They are serial reformers, and their attempts have had varying degrees of success (from total failure to middling impact).
Limnet (London Insurance Market Network) 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 £70 million, was abandoned in 2006. Project Darwin, which operated from 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), a claims and premiums processing joint venture, was formed in 2000 and runs adequately but still has a lot of paper involved.
A swift walk round Lloyd’s, perhaps passing by the famous Lamb Tavern in Leadenhall Market, reveals a lot of heavy bundles of paper, lengthening the arms of long-term insurers.
Does ontogeny recapitulate phylogeny?
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.”
In a similar way, TOM seems to be going through all the previous stages of former wholesale insurance modernization projects, databases, networks and messaging centers, but it may come out at the end to realize the potential of mutual distributed ledgers (aka blockchain technology).
Information technology systems may have now evolved to meet the demanding requirements of wholesale insurance. And 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, not to mention in 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.
TIn terms of market structure: People use trusted third parties in many roles—in finance, for settlement, as custodians, as payment providers and as poolers of risk. Trusted third parties perform three roles, to:
- Validate — confirming the existence of something to be traded and the membership of the trading community
- Safeguard — preventing duplicate transactions, i.e. someone selling the same thing twice or "double-spending"
- Preserve — holding the history of transactions to help analysis and oversight and in the event of disputes.
