S&P: U.S. Workers’ Comp Insurers Face Weakening Rates

March 14, 2008

The U.S. workers’ compensation insurance business is not for the faint of heart, according to an article published by Standard & Poor’s Ratings Services. The article, titled “Weakening Rates Could Squeeze U.S. Workers’ Comp Insurers Later This Year,” says the fact that workers’ compensation insurance is highly regulated, and regulations are different in every state, makes the business challenging. Additionally, “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,” the article says.

Workers’ compensation rates have been declining, significantly reducing the margins of insurers that write this business, the article indicates. “However, so far, these declining prices have not led to weak insurer performance because state reforms have contained loss costs and led to better earnings. But such measures 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’ compensation insurers, Standard & Poor’s focuses on where a company generates its business because each state offers 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 result, S&P says, 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.

To purchase a copy of the article, visit www.ratingsdirect.com.

Source: S&P

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