For the first time since the Great Depression, leaders in theinsurance industry are facing truly challenging economicconditions. For most of us, this will be the biggest challenge ofour business careers. Will we succeed splendidly or fail miserably?Let's consider the issues facing us in 2009 and how we might bestrespond to them.

Capital-to-Surplus Ratios

Insurers authorized to underwrite long-term care and otherhealth insurance products in Florida are mandated by statute tomeet minimum Florida-specific capital and surplus requirements andNational Association of Insurance Commissioners Risk-Based Capitalratio standards. Life and health insurers must maintain capital andsurplus to the greater amount of $1.5 million or four percent oftotal liabilities, plus six percent of liabilities for healthinsurance.

Increased insurer liquidity is a top priority to ensurefinancial solvency. We can expect Florida Insurance CommissionerKevin McCarty to press for de-leveraging of insurer assets and toliquidate assets to replenish equity. McCarty has stated thatapproximately 88 percent of Florida's over-60 population lackslong-term care insurance coverage.

Murray v. Mariner Decision

In 2003, the Florida Legislature enacted comprehensive workers'compensation reforms, which resulted in significant rate reductionsover the ensuing years. An integral part of the reform package wasthe elimination of hourly fees for claimants' attorneys and theestablishment of fee guidelines based on a percentage of benefitsobtained for cases arising after Oct. 1, 2003. In its recentlandmark decision in Murray v. Mariner Health/ACE USA, the FloridaSupreme Court found the fee changes were not justified, quashed therulings made in three previous 1st District Court of Appealdecisions, and increased the award of claimant attorney's fees. TheFlorida business community should endeavor to resolve thisambiguity during the 2009 legislative session, as it will adverselyincrease Florida workers' compensation rates.

Embrace Technology

There is a delicate balance between allocating time andresources to personally meet with customers face-to-face andutilizing technology to stimulate sustained, profitable businessgrowth. Barack Obama recognized the power of technology early inhis 22-month presidential run. His campaign raised a staggering$200 million-plus, primarily in small donations from everydayvoters, with an impressive technology-based grassroots campaign.This is clear evidence that to compete in today's market,organizations must focus on business drivers that can be enhancedby technology, such as:

Continued Profitable Growth – growth by acquiring competitors'customers and/or mergers and acquisitions

Speed to Market – better data and policy management andanalytics to help identify product opportunities

New Technologies for Product Development – product developmentworkstations, collaboration and workflow, electronic filing anddashboards

Ease of Doing Business – increased agency connectivity,increased online customer support and expedited billing to betterserve customers

Expense Control – claims management tools to automate moreprocesses and improve outcomes, plus a greater focus on reinsuranceplacements

Aggressive Litigation Management

The American Tort Reform Foundation annually ranks America'smost inequitable, plaintiff-oriented venues in civil lawsuits. In2007, South Florida; Rio Grande Valley and Gulf Coast, Texas; CookCounty, Illinois; West Virginia; Clark County, Nevada; and AtlanticCounty, New Jersey, topped the list.

Insurers should pay close attention to customers and claimsvenued in these and other volatile locales. Insurers may need toadjust indemnity and expense reserve projections in these venues —or better yet, aggressively work with counsel to resolve volatileclaim issues early.

Clients should periodically review defense counsel rates toensure they are in line with industry standards. A comprehensivereview of the law firm's technology, billing practices, and vendoragreements also should be conducted.

Business Process Outsourcing

Business Process Outsourcing (BPO) isn't just about savingmoney. A growing number of insurers are looking at BPO as a way tobecome more agile and to introduce new technology to improveprocessing and customer service.

Today's top process focus areas are policy and claimsadministration and customer service. Growth, speed, ease of doingbusiness, and expense control are necessary to maintain competitiveposition.

On the agency side, priorities should be focused on reviewingagent business, processes, and Web site technology effectiveness.Management should consider agency loyalty, minimizing oreliminating silo channels by integrating lines of business, andstaying current on outsourcing trends to help business grow. On thecarrier side, top challenges include resource optimization andscalability, data quality, compliance, and service. Insurers shouldconsider outsourcing to better predict and manage costs and toremain focused on core competencies at this crucial time.

Key Insurance Issues in Washington

Democrats now control the White House, are projected to gain 18seats in the House, which would give them a 252-to-173 majority,and enjoy a 56-to-44 majority in the Senate. Our industry will belobbying and watching closely as critical issues are addressed,including optional federal insurance for the Troubled Asset ReliefProgram, credit scoring in policy underwriting, insurance andfinancial services regulation, and whether wind coverage will beafforded under the National Flood Insurance Program — a proposalstrongly opposed by the insurance industry.

Alternative Risk Financing

As the market grapples with ways to attain stable growth andprofitability, alternative risk financing techniques are anincreasingly popular consideration. Thirty percent of the U.S.insurance market consists of alternative risk financing, with 90percent of this consisting of Self-Insured Retention (SIR).

Captives, while offering accelerated tax benefits, are costly toform and to manage, and senior management support is critical tosuccess. Also, a letter of commitment from participating members atprogram inception is necessary to avoid future disputes. Riskpooling with adequate SIR is recommended, particularly to settleclaims quickly. Interested parties should seek expert advice aboutthe merits of alternative risk financing before considering any ofthese risk management options.

The Market Will Harden

The soft pricing market is on the upswing. Although P&Crates have decreased virtually every month since March 2005, whenthe current soft market began, rate decreases have moderated overthe last several months. The financial markets have deterioratedand a number of major insurers face unprecedented challenges,underwriting results are down, and investment income has declinedas well. In October, MarketScout predicted that the soft marketcycle will turn: the market is expected to harden in 2009, first incommercial property, then in commercial lines, then in personallines.

Increased Regulation Projected

The Obama administration will undoubtedly seek ways to avoid areoccurrence of what we are experiencing today. We can expectincreased pressure for federal insurance regulation when practical.Also, state insurance departments will endeavor to tighten controlswith limited available resources to ensure compliance with unfairclaim practices regulations. If you purchase another insurer, don'tbe surprised by a financial ratings agency downgrade until you cansuccessfully prove the decision was the correct one.

The Industry Will Bounce Back

History has shown the insurance industry is financially solvent,resilient, well capitalized, and able to absorb even the mostextreme financial crisis. The accompanying chart shows 10 of thetop publicly traded companies in our industry. The differences inthe November 2007 and November 2008 last-trade prices of some shockthe conscience. However, with a close re-evaluation of businesspractices, including disciplined underwriting, sustained profitablegrowth, customer support, reducing cost and minimizing portfoliorisk, financial stability is attainable.

A year from now, it will be interesting to compare eachcompany's numbers to their current results. If history is a judge,these prices will have rebounded.

Yes, the challenges are many. But with keen focus and attentionto these issues, we will emerge from this meltdown stronger thanbefore.