U.S. workers' comp insurance is a tough business to be in, what with sagging prices, rising costs and disruptive environments in many states, according to Standard & Poor's Ratings Services.
The firm published an article today warning that "Weakening Rates Could Squeeze U.S. Workers' Comp Insurers Later This Year."
S&P described the comp insurance sector as highly regulated, with differing rules in every state. Besides the regulatory challenges, "players in this market must also contend with the long-tailed nature of claims, persistently high medical cost inflation, and the possibly disruptive effect of periodic reforms and state-run funds," said S&P.
The rating firm noted that comp rates have been declining, significantly reducing the margins of insurers that write this business.
However, it said that so far, these declining prices have not led to weak insurer performance because state reforms have contained loss costs and led to better earnings. Such measures, S&P warned, can only forestall the inevitable for so long, and the ratings on workers' compensation insurers could face negative pressure in the latter part of 2008 and in 2009.
When analyzing workers' comp insurers, S&P said it focuses on where a company generates its business because each state offers very different opportunities and profitability potential.
Court decisions and state law control many critical characteristics of the business--such as claims frequency, payment severity, settlement of disputes and the size of benefits that claimants may receive, the company said.
The result is that these characteristics also influence insurers' strategies and the pricing and earnings for companies writing this very complex product line, and significant differences by company and state are recognizable.
The S&P reports are available to subscribers of RatingsDirect, the Web-based source for Standard & Poor's credit ratings, research and risk analysis, at www.ratingsdirect.com.
Persons who are not RatingsDirect subscribers can purchase a copy of the report by calling 212-438-9823 or sending an e-mail to tresearch_request@standardandpoors.com.
Ratings information can also be found on S&P's Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.
Standard & Poor's is a division of the McGraw-Hill Companies.
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