The U.S. workers’ compensation insurance market continues to evolve, with rising medical costs, cumulative trauma litigation, and reserve adequacy concerns driving significant changes.
When looking at the key factors driving changes in the market, it is important to understand their impact on claim severity. Several economic and regulatory factors come into play, starting with how businesses, governments, and various agencies are reevaluating their budgets, expenditures, and financial outlook and are changing their approach to claims as a result. While a decline in frequency remains, the cost of medical care is rising, leading to increased severity in claim costs.
Another notable trend is the rise in mega claims, elevated through increased medical costs. These claims require more resources, faster and more comprehensive intervention, and higher caliber claims expertise to manage. With medical advances throughout the world, survivability and recovery rates are improving, but this requires longer and better lifetime support.
Mega claims are fueled by rising jury damages and are amplifying claim severity across states. These verdicts can in part be attributed to social inflation, which is driven in part by desensitization to large verdicts and corresponding media impact, negative public sentiment and corporate accountability, erosion of tort reform and litigation funding.
Adopting a multifaceted approach to counteract these influences is likely to yield the most significant results. Measures could include leveraging advanced data analytics to prevent and predict claims with high jury damages, exploring alternative dispute resolution methods, and tapping into partners with specialized expertise who can support policy holders with training, resources, and tools.
Data analytics and technology are powerful tools for mitigating increasing claim severity, specifically in identifying co-morbidities and psychosocial factors early in developmental cases to develop strategies before they become severe.
Historical claim benchmarking and analytics provide carriers with insights into emerging trends and patterns that contribute to claim complexity and associated severity, assisting in making informed decisions and developing strategies to overcome these challenges.
Predictive models can help pinpoint potential high-risk claims, identify where intervention may be helpful, and directional changes needed, allowing carriers to stay ahead of the curve, while performance analytics play a crucial role in facilitating more informed financial decisions.
Those looking to get ahead of the trends would be well served looking at states like California, which is typically at the forefront of workers’ compensation trends. In 2024, California, representing nearly a quarter of the U.S. workers’ compensation market, produced a combined loss ratio of 127%, prompting an 8.7% pure premium rate increase, the highest in more than a decade. This signals the emergence of a potential tightening market, and underlying issues such as escalating medical costs, increased severity of indemnity claims (especially the surge in complex claims like cumulative trauma), and higher litigation expenses versus a workers’ compensation premium stagnation that has not kept pace with rising costs.
The rate increases indicate a shift in workers’ compensation line (albeit exclusive to California for now) in terms of exposure trends. The industry should prepare for the potential subsequent shifts in regulations across other states, especially those considered “bellwether” in regulatory advances, particularly in how they affect outcomes as it relates to cost, access to care, compensability, and even presumption.
The workers’ compensation business segment has been used to years of declining frequency and a soft workers’ compensation market. However, in some states, like California, the trend appears to be reversing. The industry must be mindful of the trends as it relates to the rise in cumulative trauma cases (CA-specific), expansion in compensability definitions, and changes to presumption of laws across jurisdictions, among many others. These trends may influence frequency and severity trends as well as rate changes beyond California.
Mental health continues to shape how the industry approaches claims. Recovery is a holistic journey, and whether laws change regarding mental health’s compensability or because some providers serve with empathy first, and account for the whole person while working toward resolution. Refining and adapting the approach to mental health and addressing injured worker needs holistically should remain a priority.
Another trend is the challenge of accessing health care, especially in rural areas. Hospital closures and consolidation, decreases in graduating Primary Care Physicians, an increased reliance on alternative providers, and providers opting out of traditional PPO networks are major concerns, especially as the cost of care continues to rise regardless of these additional factors.
Medical and health care inflation continues to drive claim severity, leading to mega claims, with the Workers’ Compensation Weighted Medical Price Index (WCWMI) showing inflation of about 2% to 3.5%. Frequency trends, which have seen positive results over the last decade, will be important to watch. As private health insurance premiums are likely to rise individuals may be opting out of insurance altogether or choosing high-deductible plans that are difficult to afford, there may be a potential shift of medical costs towards a no-fault system like workers’ compensation.
The restriction to care and associated costs has the greatest impact on the injured worker and their recovery. Individuals in rural and more distantly placed areas will not be able to access care in a timely manner or may rely on alternative medical sources for care, leading to potential delays in preventative care and/or following an injury. In both instances, this has the potential to increase the severity and complexity of cases once they occur. Focus on early intervention, employee advocacy, treating the whole individual, and developing comprehensive treatment plans that address co-morbidities, psychosocial factors, and mental health will need to remain the focus to control these costs. Furthermore, continued focus must be applied to developing and nurturing outcome-based, accessible networks where providers understand Workers’ Compensation and can offer appropriate and timely care based on the injured workers’ needs.
Navigating the constantly shifting and potentially tightening workers’ compensation market is necessary to reducing mega claims and requires proactive strategies, early client engagement, and comprehensive market knowledge. Looking ahead, staying updated on state-level legislative changes, such as presumption laws for mental health injuries and hybrid work compensability challenges, is vital for adapting to market conditions.