What’s Next For Workers’ Comp?

The workers’ compensation market appears to be doing well again.

Ahead of its annual “State of the Line” report to be released in early May, National Council on Compensation Insurance (NCCI) Chief Actuary Donna Glenn told Insurance Journal that while NCCI can’t predict the future, there doesn’t appear to be any “imminent reversal” to these positive current trends.

NCCI’s 2024 report showed that while premiums across the workers’ comp market increased just 1% overall in 2023, the line remained the most profitable in the property/casualty market, with a combined ratio of 86.

Last year was the seventh consecutive year the workers’ comp line held a combined ratio below 90, according NCCI, an organization that provides analysis and recommendations on workers’ comp loss costs and rates in 38 states.

But the possibility of a change in that trend has some workers’ comp specialists asking: What’s next for the line, and when, not if, will the market turn?

Patrick Edwards, area senior vice president, workers’ comp practice leader, for RPS, believes there is some “masking” going on when looking at the line’s good news results.

“When I talk to various carriers, some of those carriers, their loss ratios are not good,” Edwards said. “They’re speaking in terms of the claims that they’re seeing and what’s going on, so I’m listening to them,” he said. Like other specialists in the line, he’s waiting to see the upcoming “State of the Line” report and results but added that those results look back. “From my vantage point–in the trenches–we see things where they are out in front versus behind.”

“My current view of the WC marketplace into 2025 has me looking out the front door of my house, and from an accident year standpoint, I’m seeing storms rage out in front of my house,” Edwards said in RPS’s recent report, 2025 US Market Outlook on Workers’ Compensation.

“The storms are due to claims-related losses/profitability issues associated with healthcare inflation and more. But as I walk to the back of my house, the way the WC carriers are processing claims reserve releases, all of a sudden the storms disappear, and it’s a beautiful, sunny day out from a calendar year standpoint, with the reserve redundancy releases from the WC carriers masking what’s really going on,” he added.

Reserve Redundancy

Underwriters say there continues to be significant reserve redundancy in the workers’ comp segment, but reserve releases in recent years may be hiding underlying deterioration of accident year combined ratios.

“There’s been a tremendous amount of new capacity that’s entered the workers’ comp space,” Edwards said, adding that insurtechs that entered the market over the past several years added significant capacity as well as pressure on rates. But, he added, some legacy workers’ comp carriers have begun to show higher accident year loss ratios in this competitive environment.

“You’re seeing some sizable numbers there (accident loss ratios), and that’s for those markets that are established, they have legacy,” he said. “They have larger reserves and the ability to release reserve redundancies.” But “if you look at their financials, they’re looking at accident years that are maybe 110, 115,” he said. However, after their reserve releases, combined ratios end up showing closer to 88, 87,” he said. “That’s where the masking aspect comes into play,” he noted. “The (sizable) accident year loss ratios, they’re happening,” he said. In his view, those “accident year” figures are a more telling indicator of what’s really going on in the marketplace.

Still, Edwards believes the overall market for workers’ comp is “working very well” and adapting to the challenges it faces. “It remains a highly competitive market, with high levels of available capacity and WC carriers looking to write as much in the product line as they can.”

Claims vs. Rates

NCCI continues to see a steady decline in claim frequency over the past two decades, with lost-time claim frequency declining by 8% in 2023–more than two times the size of the long-term average decline.

“Continued long-term declines in frequency, moderating severity, and growing wages are trends that NCCI analysts watch closely,” Glenn told Insurance Journal.

There’s a lot to consider about today’s labor market and how potential economic changes, or a recession, could impact the line going forward.

“There are multiple unknowns at this point,” Glenn said, adding that the NCCI is paying close attention to the labor market and any changes that might happen this year. “Each industry has its own story when it comes to additional risk for employees and the line overall,” she noted.

“The impact of labor market shifts is different by industry.” Changes in employment in each sector of the economy and the details of those changes do influence the number of claims overall, Glenn said.

But the big question everyone is asking is whether the market cycle for workers’ comp will take a turn in 2025.

Typically in expanding economic times, and when payrolls expand, more workers’ comp coverage is needed, often leading to an increase in claims activity. But during an economic downturn, when premiums fall, claims tend to decline. That’s not what is happening today.

“What we’re seeing in workers’ compensation is actually very atypical,” Glenn said in a recent NCCI’s podcast, State of the Line, in February. “And while many are asking, ‘When will workers’ compensation turn?’ we often modify that and say, ‘Given a decade of consistent results, will there be a turn?’”

NCCI said workers’ comp combined ratios have remained below 100–the mark of profitability–in recent years due to three primary trends: continued long-term declines in frequency; moderate severity; and growing wages. When wage growth outpaces frequency and severity changes, loss costs will continue to decrease.

However, Glenn said that changes in workers’ comp that happened a decade ago continue to help drive better results for the system overall, something she calls “system maturity.” For example, “today, we have medical fee schedules that are effectively managing cost increases,” she said. Those fee schedules have been effective in helping regulators, and the system in general, make more informed, data-driven decisions on cost, she said.

Medical costs are always a top priority for the system because most of the cost in workers’ comp stems from medical. “Medical fee schedules implemented by state regulatory bodies have helped stabilize and regulate costs for workers’ compensation,” she said.

Medical inflation is always a concern, and that hasn’t changed. But a recent NCCI report on medical inflation specific to workers’ comp shows that physician care price changes as of Jan. 1, 2025, for Medicare and Medicaid patients were smaller than in 2024, leading to slower year-over-year growth in prices for the largest areas of workers’ comp spend.

Glenn also noted that the softening trend in price growth for facilities persisted again in Q1. “Price growth for both hospital inpatient services and hospital outpatient services remained below recent averages and may trend back up toward those trends over the course of the year,” she said.

When it comes to medical costs, price and utilization matter, she added. “Price being how much an individual procedure costs, while utilization is the amount of service provided.”

Tariffs and Economic Uncertainty

Economic uncertainty and the potential impact of tariffs on the economy could also be catalysts in changing market conditions, some experts say.

“The economy, and the strength of the most recent few years of economy, have been helpful in keeping claims low,” said Adam Friedlander, president of Friedlander Group in New York. But if the economy changes and as predictions of a recession come into play, then that might mean change in the workers’ comp system, he said.

Friedlander, who specializes in workers’ comp for businesses across New York and manages 10 safety groups underwritten by the New York State Insurance Fund, has enjoyed fruitful times in the line over the past 10 years. He said his firm’s performance, profitability, and the dividends they pay to members in his safety groups have performed “amazingly well” in this workers’ comp environment. But he believes the bottom of the market is inevitable.

Today, he sees claims continuing to trend down but he’s not sure why. “When I ask the top experts in the field, ‘Why are claims going down, what’s the silver bullet reason?’ I never can quite get an answer,” he told Insurance Journal. “I mean, yes, there’s improved safety, the economy has a lot to do with it; it’s been strong. But I kind of always felt that at the end of the day it’s just cyclical–except this cycle hasn’t seemed to turn, yet.”

He said in home healthcare, for example, rates are down 60% since 2018. “It’s just a gigantic decline in rate and it’s still profitable,” he said. Those profits flow back to his group members in the form of a dividend, he said. “But I do think when you cut the premium down to the bone, when you cut it 60% in terms of rate, eventually you’re going to hit bottom,” he said.

Friedlander has been expecting the end of the market cycle for some time. “But each year the rating board comes out with an additional drop in rate,” he said. “But I think we’re very near the bottom” he added. “How much further can you go?” he asked. “Eventually claims will have a bad year, and with rates so low, there’s going to be no alternative but to raise the premiums,” he said. “Even though it’s gone on longer than I think anyone expected, it will hit bottom and then have to go up.”

Threat of Rising Costs in Pharmaceuticals

Should tariffs come to the pharmaceutical industry on imported drugs, that could also bring change to the workers’ comp system.

The chief executive of W.R. Berkley Corp., W. Robert Berkley Jr., said during a recent first-quarter 2025 earnings conference call that the impacts of tariffs on loss costs for the industry as a whole should not be ignored, including for workers’ comp.

Berkley noted that a lot of pharmaceuticals are manufactured outside the United States, highlighting a potential link between tariffs and workers’ comp medical costs.

“As you would expect, we’re particularly focused on both auto, particularly around the physical damage, as well as property. But I think it would be a mistake for one to discount other lines,” he said.

During past conference calls, Berkley has spoken about his reservations regarding the workers’ comp line–specifically the unappreciated impact of medical severity of claims costs even as frequency has trended downward and pricing decreases have continued.

An analyst asked Berkley in the Q1 call to discuss the potential impact of a recession on workers’ comp insurers, specifically asking whether higher-than-historical wage inflation levels had been a tailwind for the industry in recent years, as suggested in a recent article by Carrier Management. “Could comp remain a profitable line during a recession?”

Berkley agreed that significant wage inflation emerged when the country was “coming out of COVID,” and that the wage inflation “comfortably outpaced” medical inflation to create “more tailwind or wiggle room for the industry.” But he added that “medical costs are a little bit more than 50% of every claim dollar. So, one should not, in our opinion, underestimate the significance around that.”

Topics
Workers’ Compensation