12 Dec 2025 Workers’ Compensation Insurance Outlook

In 2024, the workers’ compensation insurance segment experienced another year of strong performance, continuing a decade-long profitability trend for insurers. Overall, workers’ compensation insurance has been a bright spot in recent years during an otherwise challenging market across various lines of insurance. New market entrants and fierce competition have led to years of declining rates for insureds. Further, stable loss trends and healthy reserves—around $18 billion—have supported underwriting profitability.

However, several emerging trends may indicate a challenging outlook for the workers’ compensation market in 2025. Despite nine consecutive years of underwriting profits and an impressive, combined ratio averaging 91% from 2015 to 2023 (which fell to 88% in 2023), Fitch Ratings suggests that the prolonged period of reserve redundancy and low claims frequency is beginning to soften.

Insurers have benefited from unusually strong workers’ compensation reserves, yet recent indicators reveal a gradual decline in reserve strength and a more cautious approach to reporting incurred losses. Insurers are also setting lower initial loss ratio estimates for recent accident years (2022-23), likely in response to a weakening pricing environment and lower incurred but not reported (IBNR) losses.

Although workers’ compensation reserves remain a strength in the industry—estimated to be between 8% and 12% redundant at the end of 2023—this buffer is decreasing compared to previous years. If competitive pressures continue or trends in loss severity change, the sector may need to recalibrate. This could impact underwriting profitability and bring the market closer to breakeven or worse outcomes.

Additionally, concerns surrounding medical and wage inflation and shifts in the workplace demographic could drive up claim costs in the future. Medical treatments are becoming more expensive, and wage growth could increase indemnity payments, further straining costs. An aging workforce and evolving job roles also bring new risks and complexities that could impact claim severity and frequency.

While rates are still expected to decrease overall in 2025, the future is largely uncertain. Insurers will need to carefully manage these rising costs and evolving risks to maintain profitability. As a result, insureds should prioritize risk management and safety initiatives to control workers’ compensation costs and reduce their exposure to potentially higher rates in the future.

Developments and Trends to Watch

• Inflation issues

—The last couple of years have been met with growing inflation concerns, impacting individuals and industries across the board. The commercial insurance market is no exception to these concerns. In the realm of workers’ compensation, this segment is primarily affected by the following types of inflation:

o Medical inflation—Medical inflation refers to rising costs for medical resources (e.g., physician services, health care facilities and supplies, and pharmaceuticals). These costs—which the National Library of Medicine asserts comprise the largest share (60%) of workers’ compensation expenses—are typically determined a year in advance based on projections by Medicare and private insurance contracts.
For 2025, employer-sponsored health care coverage is set to increase by 9%, exceeding $16,000 per employee. Further, the Centers for Medicare and Medicaid predict health care spending will rise by 5.4% each year through 2028, presenting ongoing medical inflation concerns. Wages in the health care sector are increasing amid worker shortages, which could drive prices up even further. Moreover, rising health care costs related to hospital expenses, physician services and prescription drugs could cause the cost of treating work-related injuries to balloon in 2025, impacting overall claim severity and workers’ compensation expenses.
It’s worth noting that the segment is better equipped to handle inflation issues than other commercial lines of coverage due to several years of profitability. Many states also have fee schedules for workers’ compensation coverage, which are predetermined expenses for medical resources. These fee schedules are intended to keep treatment costs for injured employees and associated claim expenses more affordable. Regardless, elevated workers’ compensation costs brought on by medical inflation are likely to persist in the coming years.

  o Wage inflation—Amid rising cost-of-living expenses and ongoing labor challenges, many businesses have increased 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, wage inflation could prompt increased rates. After all, higher wages are tied to greater benefits, and benefits and premiums must remain in balance to ensure workers are adequately reimbursed for lost income following occupational illnesses or injuries. Most states have an index for wage inflation to ensure premiums and benefits keep up with each other, but it’s still possible for errors to occur. For 2025, the impact of wage inflation will depend on how well the market balances the positive impact on premiums against the rising claims costs driven by higher medical expenses.

Altogether, while the market has been resilient, the combination of medical and wage inflation could create upward pressure on claims costs and premiums in 2025, with the extent of profitability depending on how well insurers manage these rising costs and evolving risks.

• Legislative trends

—Various legislative trends have the potential to impact the workers’ compensation market in 2025. The following are some key highlights:

oEmployee mental health challenges—According to the Centers for Disease Control and Prevention, mental health concerns are on the rise. One in 5 U.S. adults experience mental illnesses—such as anxiety, depression and post-traumatic stress disorder (PTSD)—each year, but just one-third of these individuals seek help. What’s worse, the National Safety Council confirmed that instances of both moderate and severe mental health distress (especially when left untreated) have been linked to a greater risk of workplace incidents. This is likely because employees facing mental health challenges are often less engaged and aware of potential safety hazards, resulting in poor decision-making, which can lead to costly workplace injuries.

In response to rising concerns, many states have or are in the process of enacting legislation that would expand workers’ compensation coverage to include job-related mental health conditions, particularly PTSD and trauma-related disorders. This legislation has been on the rise since the beginning of the COVID-19 pandemic, during which some employees (e.g., health care workers and first responders) encountered a decline in their mental health due to larger workloads and more stressful or dangerous job conditions. In 2024, the National Council on Compensation Insurance tracked 64 bills related to workers’ compensation and mental health, with a significant portion related to PTSD compensability. Such legislation is likely to continue to be created next year.

It’s important to keep in mind that coverage capabilities and eligibility requirements vary between states. The majority of current laws are focused on health care workers and first responders, such as police officers and firefighters, but there is a push to expand benefits to other professions. Most of this legislation places the burden of proof on impacted employees, meaning workers must provide clear evidence that their conditions resulted from their jobs to obtain coverage. This can be challenging, as mental health injuries are often harder to quantify and directly link to specific work duties.

  o Marijuana—Marijuana legislation in the United States is evolving, presenting several unique challenges for the workers’ compensation market. While it remains illegal on the federal level, there’s a growing push for state legalization of both medical and recreational marijuana. This creates a conflicting regulatory environment for employers, insurers and workers. As of 2024, many states have enacted or are considering enacting new legislation related to marijuana use. In fact, according to the Pew Research Center, 74% of Americans live in a state where recreational or medicinal marijuana is legal.

As it stands, the workers’ compensation system faces a confusing legal framework where marijuana is both prohibited and accepted, depending on the context. This raises important questions about how workers’ compensation programs may respond following a claim related to marijuana use. Some states—including Kansas, Missouri and South Carolina—have proposed marijuana legislation that explicitly prohibits workers’ compensation reimbursement. Other states, like Massachusetts and New Jersey, have considered allowing reimbursement under certain circumstances. This variation between states could create inconsistencies across state lines and increase the compliance burden for multistate employers.

Complicating matters, there’s constant debate around the positives and negatives of marijuana as it pertains to worker health and safety. On the one hand, marijuana advocates argue that it can be an effective medical treatment, particularly for pain management, which can reduce the need for opioids and other drugs. Conversely, concerns persist related to marijuana’s effect on injury rates. One study found that the number of workplace injuries increased among employees aged 20-34 following recreational marijuana use. In contrast, previous research has found injury rates among older workers typically decline after recreational marijuana is made legal in their states.

Together, these factors create a complex regulatory environment that’s only made more nuanced with the ongoing discussion around marijuana’s benefits and drawbacks. Employers need to balance compliance considerations, workers’ rights, employee access to medical treatments and workplace safety in a rapidly changing environment.

          o Independent contractors—In March 2024, the U.S. Department of Labor issued a final rule that provides criteria for determining a worker’s status under the Fair Labor Standards Act. In general, this rule has made it more difficult to classify workers as independent contractors through the “economic reality” test set forth by the legislation, further complicating discussions around gig worker rights.

The distinction between traditional employees and independent contractors is especially important in regard to workers’ compensation coverage. Notably, independent contractors are typically excluded from traditional workers’ compensation protection, and while gig workers often set their hours and choose what jobs to take, their work commonly exposes them to the same kind of safety risks faced by traditional employees. As a result, many argue independent contractors should have access to workers’ compensation protections, and there has been a push for expanded coverage in some states.

For instance, in 2024, Washington passed legislation that would extend survivor death benefits to dependents of transportation network company drivers. Other states, like California, have elected to place the burden of providing benefits on the contracting company itself (California’s Proposition 22 mandates that rideshare companies provide specific benefits to drivers).

However, expanding coverage could impact the financial stability of the system, requiring premium adjustments to account for a larger risk pool. As the nature of work shifts, the workers’ compensation system is being forced to adapt, and ongoing legislative and regulatory efforts will likely continue to redefine protections for gig workers.

• Shifting workforce demographics

—Businesses of all sizes and sectors have been impacted by substantial labor shortages over the last several years. There are a range of factors currently contributing to such shortages. Specifically, multiple workforce movements have occurred since the beginning of the pandemic, motivating a considerable number of employees to leave their positions in search of new roles that better suit their changing job priorities (e.g., greater work-life balance, higher pay, additional benefits and increased flexibility) or exit the labor market altogether. In response, many businesses have resorted to hiring more inexperienced and entry-level employees. Additionally, employees in the baby-boom generation are working far longer than their predecessors, with many holding off on retirement until they reach their 70s. According to the Bureau of Labor Statistics, the share of workers ages 75 and older in the labor force is projected to grow by 96.5% over the next decade. These trends have shifted overall workforce demographics, resulting in a larger proportion of both new and aging employees and elevating related occupational safety and workers’ compensation exposures.

Regarding new employees, these workers are more susceptible to on-the-job injuries, with a recent industry report finding that 34% of occupational injuries stem from employees who have been in their roles for less than one year. These incidents have led to nearly 7 million missed workdays and contributed to one-third of total workers’ compensation claim expenses. While new workers play a major role in claim frequency, older employees heavily influence claim severity. According to the industry report, workers aged 60 and older account for just 13% of occupational injuries, but these injuries are often much more severe and take longer to recover from. Consequently, average workers’ compensation claim costs for employees in this age group are 15% higher than those aged 34-49 and 140% greater than those aged 18-24. As these employees occupy a rising proportion of the labor market, employers are more likely to face exacerbated claim expenses. Considering these challenges, adopting effective employee retention strategies and providing routine, in-depth safety training for all workers have become top priorities for many businesses.

• Technology and workplace safety

—Artificial intelligence (AI) technology has the potential to change many aspects of the workplace, especially as it pertains to preventing and managing occupational injuries. Thus, implementing this technology could have a significant impact on organizations’ workers’ compensation programs. In particular, it can utilize advanced imaging, scanning and data analysis techniques to provide fast diagnoses when workers get injured on the job, deliver more in-depth insights regarding employees’ conditions, and promptly review medical records and injury characteristics to generate customized treatment plans. Further, AI tools can be paired with wearable devices and sensors to offer real-time monitoring of injured employees, automate certain rehabilitation components and adjust treatment plans as needed based on workers’ recovery progress. In turn, this technology can help expedite and enhance injured employees’ recovery outcomes, therefore mitigating related workers’ compensation losses.

AI solutions can also promote cost-effective claims management by leveraging sophisticated coding capabilities and predictive analytics to determine primary causes of workplace incidents and suggest methods for preventing future incidents, detect injury trends and patterns, recommend top-performing health care providers, identify possible treatment anomalies and cost drivers, and reduce overall claim complexity. In fact, the latest industry data revealed that using AI technology can help employers lower their workers’ compensation claim expenses by up to 45%. Looking ahead, businesses can’t afford to ignore the benefits of incorporating this technology within their workers’ compensation programs.

Tips for Insurance Buyers

• Implement safety and health programs to address common risks, especially when using a loss-sensitive workers’ compensation program.
• Conduct routine safety training for employees of all ages and experience levels.
• Consider implementing various digital solutions, such as wearable safety technology and AI tools, to help prevent incidents, treat employee injuries and navigate the claims process within your workers’ compensation program.
• Regularly review your experience modification factor (mod) with your insurance professionals to fully understand how it impacts your premiums. A mod is an indicator of your claims history compared to similar businesses, and even small changes can have a big effect on your costs.
• Establish workplace wellness initiatives aimed at preventing or treating chronic health conditions and improving the overall well-being of your staff. Additionally, consider incorporating mental health resources and support options within employee wellness offerings.
• Develop an effective return-to-work program that properly supports employees in the process of healing from a work-related illness or injury and resuming job duties following their recovery.
• Develop policies and procedures aimed at helping remote employees make their workspaces more ergonomic and prevent injuries while working from home.
• Ensure accurate payroll projections. Correct wage information is critical for accurate premium calculations, especially amid rising inflation concerns. Errors in payroll projections could present serious consequences, such as inadequate rates, insufficient benefits or a lack of ample coverage following costly claims.
• Pay close attention to applicable state-regulated and carrier-negotiated fee schedules for workers’ compensation coverage. They allow employees to receive much-needed health care for work-related illnesses and injuries without significantly driving up claim costs, even with medical inflation issues on the rise.
• Have clear processes established for handling workers’ compensation claims as diligently and efficiently as possible. Effective claim management protocols can often help mitigate claim severity and prevent similar losses from occurring in the future.