The convergence of Wall Street's meltdown, falling insuranceindustry surplus, uncertainty over the future of medical carefinancing and a persistently soft commercial lines market hascreated a perfect storm of challenges for liability carrierscovering long-term-care facilities. To survive and prosper, healthcare liability underwriters must therefore stay focused on corecompetencies and use best practices with risk selection andpricing.

This market will not reward cash-flow-conscious or creative butunprincipled underwriters. Such mavericks could be in store for aworld of hurt as this market unfolds. Ignoring the simple principleof whether each individual risk placement strengthens the book as awhole might boost the top line in the short run, but the bottomline result could be quite messy.

Some of the looming challenges to the LTC liability market thatlie ahead appear quite predictable. For even the most disciplinedunderwriters, the following challenges will be difficult toovercome.

o Diminished Confidence. An insured's confidence in thefinancial rating of companies will be severely tested.

Soft markets are characterized by “commoditized” products. Addthe perceived uncertainty of whether a carrier possessing a strongfinancial rating from an independent rating firm carries muchinfluence for a line of business with a moderate tail, and insuredsmight wonder if their current carrier can meet their obligationswhen they come due.

o Adverse Risk Selection. Many LTC owner/operators notexperiencing the painful sting of claims in the recent past willweigh their options closely.

Tightened discretionary dollars might prompt them to look intothe justification of carrying insurance. If they feel theirexposures are manageable and calculable, barring any contractual orother requirements, these operators might elect to go bare ofliability insurance altogether.

Conversely, owner/operators familiar with a history of claimswill likely continue to look for attractive ways to transfer riskto insurers. If the pendulum shifts too dramatically from insuringthe desirable risks to the latter, less-desirable exposures, acorresponding dilution of underwriting results can be expected.

o Increased Frequency. Loss frequency, which reached a plateauin 2007, might very well rebound in the wake of the currentfinancial environment.

With the overwhelming majority of LTC beds being Medicare- orMedicaid-supported, most residents are required to liquidate assetsas a condition of receiving government assistance. This dynamicoften puts residents and their next of kin in an adversarialposition with care providers.

Such estate depletion can only be expected to exacerbate giventhe distressed financial market. Next of kin, who are generallychildren of the LTC resident, might have suffered their own as wellas the estates' financial losses due to market conditions. Thisimpact might feed a willingness to engage in frivolous lawsuits,which consequently will drive up claim frequency.

o Rising ALAE/Retention Enforcement Issues. Increased frequencywill drive up allocated loss adjustment expenses, or ALAE. Coupledwith reducing insured retentions, the burden of paying for ALAEwill be largely shouldered by carriers. As a result, underwritingprofit margins will dwindle.

With those accounts trading premium relief in exchange forassuming more risk via retentions, the financial impact on theaccount could lead to the retention being unpaid by the insured,thus requiring the insurer to step into active defense at theretained level to protect its interest.

LTC liability claims have a moderate tail, which means anaccount placed today could be financially viable now, but becompromised when dollars within the retention are needed. Thatcould put a carrier's adjuster in the unenviable position of beinga collection agent.

o Staff turnover. There has been much discussion in recentmonths about nursing shortages in skilled care facilities. Withemployment options in abundance for good nurses, skilled carefacilities may not be their election of choice.

Couple this with financial woes resulting from payment problems,and good nurses might elect more comfortable and less financiallyrestrictive settings than nursing homes as their employer.

Diminishing job attractiveness could result in nursing homesemploying lesser-experienced nursing staff, or having to go outsidethe organization to staff positions. Among the resulting concernsare providing less quality care and lesser control applied over thenursing staff.

o Scaled-Back Risk Management. With less discretionary cash,insureds might put less money into their own internal losscontrol/loss prevention initiatives.

Financial duress might require they cut back to acceptableminimums. In many states, such minimums would represent the riskmanagement provided by the carriers themselves.

o Apathy/Resentment. With share values precipitously dwindling,it's not likely that the public will show much sympathy to theplight of stock insurers.

Action could range from apathy in the form of not contributingto carrier capital contributions by purchasing stock, to a moresevere resentment of financial institutions as the perceived causeof the current economic situation. Potential jurors called to siton cases against insurers might be negatively predisposed to makethe carriers pay.

Apathy and resentment are not feelings a carrier wants presentin a jury panel composition. The selection process might weed sometainted jurors out, but likely some will make it through. If thisbecomes widespread, plaintiff judgments and their resultant rewardscould elevate appreciably, even in more conservative venues.

The bottom line is that, given all of the issues beyond carriercontrol present in the current financial and insurance market, itis imperative that insurance providers of LTC liability insurancenot lose sight of the principles of good business–prudentunderwriting, risk selection and accurate pricing for the riskprofile.