The medical malpractice insurance market appears likely to soften more, as insurers continue to battle what one ratings service calls “significant challenges.”

Standard & Poor’s Ratings Service is forecasting that the market will continue to soften as prices declined at a more moderate pace.

The ratings service notes that medical malpractice insurance writers apparently achieved better operating results in 2008 and through the first nine months of 2009 than it had forecast two years ago because of larger-than-expected favorable reserve development.

“Even without the ups and downs of the pricing cycle, medical malpractice insurers face significant challenges, including volatile losses, the long-tail nature of the reserves and exposures, and the potential for adverse legal verdicts,” Standard & Poor’s said in a statement. “We have only seen a handful of insurers sustain profitability throughout pricing cycles, and they have generally been the larger, more diversified insurers in a highly fragmented industry.”

The ratings service said it expects many medical malpractice monoline companies to ultimately report a stable or improved combined ratio for 2009, mainly because of reserve releases, a trend it anticipates will continue through 2010 and mitigate the expected decline in prices.

Some insurers might outperform the medical malpractice market, with combined ratios of less than 90% in 2009 and 2010 based on superior underwriting controls, continued (but slower) reserve releases, and their ability to diversify geographically, according to Standard & Poor’s.

“The mix of operating expenses and investment income will clearly influence the prospects of the malpractice insurers in the near term,” the ratings service said. “But in this soft market, we will increasingly focus on prices, loss-cost trends, and reserve releases and their potential impacts to earnings and capital for medical malpractice insurers.”