Market quietly evolving as profitability comes under pressure

Net written premium18 declined 0.2% to $41.6 billion, as modest payroll growth was offset by continued declines in loss costs.

Lost-time claims frequency fell an estimated 2% in accident year 2025, a slower decline than in prior years. Indemnity severity increased 4%, in line with wage growth, while medical severity rose 4%, outpacing the 1.8% increase in NCCI’s Workers Compensation Weighted Medical Price Index. NCCI attributed this primarily to higher utilization, suggesting a shift toward more complex claims.

Tariffs on imported medical goods present additional upside risk to medical severity, particularly for claims involving surgery, prosthetics, or extended rehabilitation.

Reserve redundancy19 continues to erode, falling to $14 billion at year-end 2025, down from $18 billion in 2023, reducing a key profitability cushion and reinforcing the need for pricing discipline.

Insurers remain interested in growth but are increasingly differentiating risks rather than competing purely on price. Workforce demographics and indemnity exposure are under scrutiny as claims involving older workers continue to drive disproportionate costs. Employers with aging workforces or elevated indemnity exposures may face more scrutiny or less favorable outcomes.

Underwriters are also paying closer attention to worker classification. The expansion of the gig economy has created ambiguity around worker status in several states, and misclassification of employees as independent contractors can create significant uninsured workers’ compensation exposure. Similarly, remote work has introduced geographic complexity many employers have yet to fully address. When employees work from states where employers have no formal presence, losses can arise in jurisdictions where coverage was never anticipated.

No single state is driving widespread deterioration. Still, in California — which is not governed by NCCI — accident year combined ratios have been steadily climbing for the last decade. In 2025, the combined ratio rose to 129, its highest level in more than 20 years, according to the Workers’ Compensation Insurance Rating Bureau of California. This warrants continued attention for employers with significant California head counts.

The current environment supports buyer-friendly pricing in the near term, with ample competition. However, the combination of a rising combined ratio, declining reserves, and moderating frequency improvements may curtail further downward rate movement across many jurisdictions for the remainder of 2026.