Worker's Compensation Outlook

The workers’ compensation insurance segment has been an outlier compared to other lines of commercial coverage, with most policyholders encountering softening conditions and modest rate decreases for nearly a decade. According to the National Council on Compensation Insurance (NCCI), strong reserves and manageable claims frequency and severity helped generate an average combined ratio of 91 from 2015-23.

Last year, the NCCI reported a combined ratio of 86, showcasing continued market stability. As such, industry data revealed that average premium decreases hovered below 2% in the last quarter of 2024 before falling even further to 2.6% at the start of 2025.

These favorable conditions are likely tied to solid underwriting results brought on by reduced occupational injury rates and fewer instances of workers’ compensation fraud. Nevertheless, insurers are growing increasingly concerned about continued reserve strength amid slowing interest rates and ongoing inflation. As insurers become more cautious in navigating certain cost drivers and maintaining profitability, it’s possible that market conditions could shift.

Current Market Trends and Cost Drivers

In the last few years, medical and wage inflation have significantly impacted the workers’ compensation segment. Medical inflation—increasing costs for medical resources such as physician services, pharmaceuticals, and health care facilities and supplies—has steadily driven up claim expenses, especially for occupational injuries requiring long-term hospital stays or prolonged treatment plans. Estimates from the Centers for Medicare and Medicaid project that health care spending will increase by an average of 5.4% annually through 2028. Specialist fees and prescription drug costs are key factors currently contributing to this inflation. Making matters worse, recent tariffs imposed by the United States could create major supply chain disruptions across the health care sector in the near future, potentially inflating costs for certain medical resources even further and, consequently, exacerbating workers’ compensation claims. Besides medical inflation, rising cost-of-living expenses and persistent labor shortages have motivated many employers to increase their workers’ pay to boost attraction and retention efforts, resulting in wage inflation. Because payroll is leveraged as an exposure base to calculate workers’ compensation premiums, industry experts predict that continued wage inflation could leave policyholders with elevated rates going forward. Mental health-related claims have also become a prevalent cost driver in the workers’ compensation space. Such claims can stem from employees experiencing certain mental health conditions—namely anxiety, depression and post-traumatic stress disorder (PTSD)—as a direct result or stressful or traumatic workplace incidents and activities. The past couple of years have seen many states enact legislation that expands workers’ compensation coverage to include job-related mental health conditions.

As it stands, 33 states now recognize PTSD and other trauma disorders as compensable, with associated claims up 18% from the previous year, according to industry data.

While such legislation originally only pertained to first responders and other high-risk positions, some states (e.g., Connecticut and New York) have begun applying these laws to all workers, paving the way for additional claims. As Generation Z takes up a larger share of the workforce in the coming years, industry experts anticipate that these claims will rise even further due to purportedly higher mental health needs among this population. In addition, multiple workforce movements have taken place since the start of the COVID-19 pandemic, causing some employees to leave their positions in search of new roles that better suit their shifting priorities (e.g., greater work-life balance) or exit the labor market altogether. This has forced employers to fill open positions with inexperienced and entry-level employees, marking a troubling development given that NCCI data found short-tenured workers are approximately twice as likely to get injured on the job and prompt associated workers’ compensation claims compared to their full-tenured counterparts. Older employees are also opting to retire later than their predecessors, with some working into their 70s. This poses various occupational safety issues, as older individuals are inherently more susceptible to certain injuries (e.g., fractures, dislocations, ligament tears and disc herniations), many of which carry extended recovery timelines.

According to industry research, employees over the age of 55 are expected to generate 25% of workers’ compensation claims by 2032.

What to Expect for the Remainder of 2025 

•  Continued rate decreases 
•  Potential market fluctuations from rising claims frequency and severity  
•  Emphasis on occupational safety programs and injury prevention

Looking Ahead

While policyholders will likely continue to encounter favorable conditions in the workers’ compensation market for the remainder of 2025, ongoing inflationary pressures and economic headwinds—particularly the possibility of a recession—have the potential to impact claims activity and cause slight premium fluctuations. Furthermore, evolving legislation surrounding mental health-related claims may motivate some insurers to reassess their current pricing structures. As workforce demographics continue to shift and influence occupational injury trends, the segment’s strong reserves could be challenged by rising claim frequency and severity. With this in mind, policyholders should be prepared for possible market changes. Above all, those with documented workplace safety programs and accident prevention measures will be best equipped to handle this everchanging risk landscape.

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This document is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. ©2025 Zywave, Inc. All rights reserved.