After years of losses, three medical malpractice insurers are currently operating in a favorable environment–but that will soon change, according to a Standard & Poor's report published yesterday.

The carriers S&P analyzed were Medical Protective Company in Fort Wayne, Ind., ProAssurance Corp. Group of Birmingham Ala., and American Physicians Assurance Corp. in East Lansing, Mich.

“Although these insurers are facing increasing competition and flat-to-declining rates in the near term, as well as the uncertain effects of tort reform across the nation, we expect they will still have an opportunity to remain profitable,” said S&P insurance analyst Jieqiu Fan.

All of the companies in the peer comparison, S&P said, are single-line, multistate, midsize insurers. These companies are peers in that they differ from large multiline insurers and physician-owned mutuals and risk-retention groups that are dominant players in the fragmented marketplace for malpractice insurance.

S&P said the hard market in medical malpractice has reached its peak, “with rates as high as they can reasonably be expected to go in the near term.”

Ms. Fan said that with relatively low barriers to entry, “it is not uncommon to see new entrants in the markets when rates are relatively high, while some players will leave when rates are low and losses mount.”

In looking at these insurers, S&P also noted that the medical malpractice sector has undergone noticeable merger and acquisition activity in the past year, with Medical Protective and ProAssurance both involved in transactions in 2005. “We expect to see heightened M&A activity in this sector in 2006,” added Ms. Fan.

Underwriting and pricing remain the key factors to success, with claims handling ability a close second, S&P noted.

“We believe that with rates flat or declining in the near term, as long as they remain adequate to cover loss costs there is still an opportunity for malpractice writers to make a profit,” according to Ms. Fan.

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