Workers’ compensation holds steady as loss costs edge higher

The Lockton results are consistent with broader industry trends. Workers’ compensation was the only major property and casualty line to experience a reduction in net written premium18 in 2025, according to the National Council on Compensation Insurance. Approved NCCI filings are expected to reduce bureau premium levels by an average of 5% in 2026.

Favorable workers’ compensation performance can provide a buyer with negotiating leverage across a broader casualty placement, including where liability pricing is under pressure. Buyers should nevertheless evaluate each line on its own merits. Using favorable workers’ compensation results to offset general liability pricing, limits, or retentions can create an imbalanced program. It may also make lines more difficult to separate at future renewals, reducing flexibility if market conditions or carrier appetites change.

Industry results remain strong, but the underlying economics are becoming slightly less favorable. NCCI reported a 2025 calendar year combined ratio of 91%, marking the 12th consecutive year of underwriting profitability. The result was five points higher than 2024 and the highest since 2016, but still represented a significant underwriting gain. When investment income is included, the line produced an 18% pretax operating gain — well above its long-term average.

Current-year results warrant closer attention. NCCI estimated a 2025 accident year19 combined ratio of 102%, compared with the 91% calendar year result. The difference illustrates the continued benefit of favorable development from older accident years while indicating that more recent business is operating with less margin.

Lost-time claim frequency declined by 2% in 2025, a more modest improvement than the long-term annual decline of 3.8%. NCCI estimated that medical and indemnity severity each increased by 4%.

Underlying medical data points to additional pressure. Preliminary medical cost per claim increased by 6%, with price increases and higher utilization each accounting for roughly half of the change.

Indemnity severity continues to be affected by wage growth, which has exceeded historical averages since 2020. If severity continues to rise while frequency improvements moderate, carriers may begin to differentiate pricing more based on industry, jurisdiction, and risk quality.

Buyers should also monitor state-specific developments. In California, the insurance commissioner adopted an average advisory pure premium rate of $1.65 per $100 of payroll, effective Sept. 1, 2026. The rate represents a 6.6% increase from the rate approved for 2025 but remains below the 10.4% increase requested by the Workers’ Compensation Insurance Rating Bureau of California (WCIRB).

The advisory rate does not bind insurers and will not translate directly into an equivalent premium increase for every buyer. Actual outcomes will depend on carrier filings, payroll, employee classifications, experience modification factors, loss history, and available credits or debits.

The California change reflects increasing medical costs, allocated loss adjustment expenses, and the frequency of cumulative trauma claims. Cumulative trauma claims account for approximately 22% of lost-time claims in California, compared with 1% to 6% in NCCI states. WCIRB also reported that California’s combined ratio increased by three points in 2025 to its highest level in more than 20 years. These results indicate meaningful pressure within California even as the national market remains profitable.

New York presents a contrasting picture. The state’s most recent workers’ compensation loss-cost action reflected a substantial reduction, continuing a multiyear pattern of declining loss costs. As with California’s advisory pure premium change, the reduction will not translate uniformly into buyer pricing. Individual outcomes will depend on carrier pricing, class mix, payroll, loss experience, and program structure. Together, the California and New York actions illustrate that workers’ compensation conditions are becoming increasingly jurisdiction-specific.

Although the workers’ compensation market remains favorable, buyers should avoid complacency. Rising severity, more modest frequency improvement, weaker accident-year results, and a declining reserve cushion suggest that current profitability may become harder to sustain. State-specific developments and potential collateral requirements add further complexity.

Higher interest rates also affect workers’ compensation. While higher rates may improve insurers’ investment income, which shores up long-tail reserves that support workers’ compensation liabilities, medical inflation, rising indemnity costs, and higher cost of capital offset some of this benefit.

Rising rates also increase the cost of collateral, creating additional pressure for buyers with large deductibles, retrospective plans, and captive programs. That makes closing claims more valuable, as doing so can reduce collateral requirements, improve cash flow, and release capital tied up in aging claims. For certain buyers, higher rates can also make loss portfolio transfers more attractive. As the cost of carrying retained liabilities and associated collateral increases, transferring those obligations to an insurer can become more economically compelling. Higher investment yields may also improve the economics for insurers assuming those liabilities.

Carriers may also respond to persistent inflation with more scrutiny around pricing, collateral requirements, and loss-sensitive program structures. They may also take a closer look at reserve adequacy, particularly on older claim years where medical costs, wage growth, and settlement values have exceeded original assumptions.

Buyers should evaluate workers’ compensation as part of their broader casualty strategy. In recent years, savvy buyers have used workers' compensation as part of a broader casualty strategy. Competition and profitability helped mitigate the impact of rising liability rates. Although workers' compensation remains profitable, if that profitability falls by even one dollar, that's one less dollar to offset liability rates.

Favorable conditions may create opportunities to adjust retentions, accelerate closure of mature claims, or explore loss portfolio transfers for legacy liabilities. These decisions should account for ultimate losses, transaction costs, cash flow, collateral relief, and adverse-development risk. Buyers should also use favorable conditions to strengthen safety, early reporting, medical management, and return-to-work programs — especially in light of rising severity trends.

The objective should be to improve the total cost of risk and preserve flexibility while favorable market conditions persist.