Prolonged market stability, strong reserves and profitable underwriting results have generated favorable conditions across the workers’ compensation insurance segment for nearly a decade, paving the way for flat premiums or moderate rate decreases for most policyholders. According to the National Council on Compensation Insurance (NCCI), the segment produced a combined ratio of 87 in 2022, demonstrating continued profitability and representing the ninth consecutive year in which the ratio fell under 100. Nevertheless, it’s worth noting that the ratio bottomed out at 79 in 2016 and has slowly risen ever since, posing the potential for diminished profitability going forward.
A few trends could be contributing to this climbing ratio. While advancements in workplace safety solutions and AI have helped mitigate employee injuries and illnesses (as well as associated workers’ compensation claims), developments such as inflation, shifting workforce demographics, ergonomic exposures among remote staff and employee mental health challenges have posed some market concerns.
Although favorable segment conditions pressed on in 2023, industry experts have reported that reserve redundancies stemming from reduced presumptive liability issues since the beginning of the COVID-19 pandemic and increased market competition could drive down underwriting profits in 2024. Fortunately, these experts also confirmed that it would take a drastic shift in segment losses to actually push the ratio over 100, thus limiting potential impacts for policyholders. As a result, most policyholders can expect another year of flat premiums or modest rate reductions, while those with higher experience modification factors may encounter increased pricing and possible coverage restrictions.
2024 Price Prediction: -5% to +2%
Developments and Trends to Watch
Experience modification factor changes
An experience modification factor plays a key role in the cost of workers’ compensation premiums. This figure represents an employer’s claims history compared to other businesses of a similar size in the same industry. It is determined using a formula set by the NCCI or state-specific rating bureaus, depending on the employer’s jurisdiction. Based on this formula, either a credit or debit is applied to the employer’s premium. Considering the impact of this figure on workers’ compensation costs, it’s important for businesses to note that the NCCI, which governs the workers’ compensation system in 36 states, is making alterations to specific elements of its experience modification factor formula for 2024. These changes are going to be rolled out on each applicable state’s regular filing date, ranging between the end of 2023 and the first half of 2024. The formula itself will remain unaltered; however, there will be adjustments in how certain foundational components of the formula are derived to more accurately account for cost variations among states.
There are two specific changes taking place: a transition from a nationwide primary/excess split point to a state-specific split point and implementation of state-specific split points, as well as a revision of the calculation of the state accident limitations. Such changes are being made to better reflect each state’s average claim costs and align with other state-specific variables. These changes may appear minimal, as the fundamental experience modification factor formula and methodology remain unchanged, but they have the potential to increase or decrease employers’ workers’ compensation premiums. In light of the NCCI’s alterations, businesses operating within applicable states should familiarize themselves with the upcoming changes and be prepared for possible premium adjustments.
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, such technology 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. What’s more, AI solutions can 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.
Employee mental health challenges
Mental health consists of individuals’ emotional, psychological and social well-being. In times of distress, individuals may experience poor mental health. Emotions associated with poor mental health include grief, stress, sadness or anxiousness. According to the Centers for Disease Control and Prevention, mental health concerns are on the rise, with 1 in 5 U.S. adults experiencing mental illnesses—such as anxiety, depression or post-traumatic stress disorder (PTSD)—each year; however, 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 concerns are often less engaged and aware of potential safety hazards, resulting in poor decision-making. These incidents lead to not only injured employees but also higher workers’ compensation costs.
Considering these findings, it has become increasingly critical for businesses to adopt supportive workplace cultures and incorporate mental health initiatives within their employee well-being efforts. Such initiatives may include training supervisors to monitor staff for signs of mental health distress, creating awareness campaigns and events to reduce stigma (e.g., meditation or yoga classes), forming employee assistance programs, providing flexible scheduling and ample time off, offering written resources and encouraging workers to utilize helplines or contact mental health professionals as needed.
In addition to considering mental health initiatives to better support employees and reduce potential workplace incidents, it’s vital for businesses to keep in mind that many states have or are in the process of enacting legislation that would expand workers’ compensation coverage to include job-related mental health conditions. In other words, workers may be able to receive benefits for mental health concerns occurring in the scope of employment and stemming directly from their job responsibilities. This legislation has been on the rise since the beginning of the pandemic, during which some employees encountered a decline in their mental health due to larger workloads and more stressful or dangerous job conditions (e.g., health care workers experiencing PTSD from treating an influx of severely ill patients during COVID-19 surges or retail workers facing anxiety from dealing with angry or aggressive customers amid supply shortages).
Forty-one states have adopted laws that provide some level of coverage for occupational mental health concerns, with various federal and state bills currently underway. Nonetheless, coverage capabilities and eligibility requirements vary between states; some of this legislation only offers benefits for mental health conditions arising in certain industries or stemming from unexpected or unusual workplace incidents, and most of this legislation places the burden of proof on impacted employees, meaning workers have to provide clear evidence that their conditions resulted from their jobs to obtain coverage. Since it can be difficult to objectively measure mental health concerns or prove they were caused by employment, securing such benefits could be an uphill battle for some workers. In any case, this legislation makes it all the more important for businesses to prioritize employees’ mental health to minimize associated workers’ compensation exposures.
Ergonomic exposures among remote staff
The initial onset of the pandemic pushed businesses across industry lines to transition to remote operations, requiring their employees to work from home. As the pandemic subsided, some employers implemented return-to-office initiatives, while others continued to offer remote or hybrid arrangements, thus creating a large-scale shift in the overall proportion of employees working from home. According to global media company Forbes, 12.7% of employees worked remotely full-time in 2023, while 28.2% had hybrid schedules. Furthermore, Forbes found that a vast majority (98%) of employees have expressed a desire to work remotely for at least a portion of the workweek.
Many employers initially thought their remote staff would be less prone to job-related injuries, but the past few years have proven otherwise. Specifically, some employees’ remote work setups are contributing to musculoskeletal disorders, causing workers’ compensation concerns. Recent industry research found that remote employees with poorly designed workstations, namely those lacking effective ergonomic measures, are more likely to experience ailments such as carpal tunnel syndrome, repetitive motion injuries, back pain, neck and shoulder sprains, headaches and digital eyestrain. According to this research, more than 40% of all workers have reported an emergence of or increase in back, shoulder and wrist pain since 2020, highlighting the severity of the problem. Multiple studies have also shown that remote employees tend to work more hours per day than their on-site counterparts, often from nonergonomic areas (e.g., bedrooms, dining tables or couches) instead of dedicated home office spaces, providing additional opportunities for occupational injuries. Because remote employees can technically work at any given time (even outside standard business hours), some safety experts have asserted that these employees pose 24-hour workers’ compensation exposures.
According to the freelancing platform Upwork, an estimated 32.6 million Americans will still be working from home in some capacity by 2025, representing more than one-fifth of the labor force. This means remote and hybrid arrangements (and their associated workers’ compensation exposures) are here to stay. As such, many businesses have started implementing measures to minimize possible remote work injuries, including creating telecommuting policies, setting fixed work hours and rest periods, establishing clear home workstation guidelines, providing remote work safety training, and conducting regular checkups aimed at identifying and remedying potential occupational hazards.
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 BLS, 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, in turn, 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 experiencing on-the-job incidents and injuries than their tenured counterparts. A recent industry report revealed that 34% of occupational injuries stem from employees who have been in their roles for less than one year, leading to nearly 7 million missed workdays and contributing 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 previously mentioned industry report, workers ages 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 take up 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.
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:
- Medical inflation—Such 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. According to the NCCI, medical costs in the workers’ compensation segment increased by an average of 1.5% annually between 2012 and 2019, while such costs jumped by 2% in 2021 and another 3.7% in 2022, more than doubling the 10-year average. Making matters worse, the Centers for Medicare and Medicaid predict health care spending will increase by 5.4% each year through 2028, presenting ongoing medical inflation concerns. Yet, the segment is better equipped to handle inflation issues than other commercial lines of coverage due to its past several years of profitability. Many states also have fee schedules in place 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.
- 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. According to the BLS, average year-over-year wage increases spanned between 4.5% and 5.3% throughout 2021-23, up significantly from 2.6% in 2020. 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 it’s crucial for benefits and premiums to remain in balance to ensure workers are adequately reimbursed for lost income following occupational illnesses or injuries. The NCCI also reported that the surge in employees receiving raises and moving from lower-wage positions to higher-paying roles could increase the risk of payroll miscalculations and create short-term disconnects between wages, benefits and workers’ compensation premiums. 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.
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.
- Review the NCCI’s upcoming changes to certain components of its experience modification factor formula. Consult trusted insurance professionals to determine how these changes may impact your workers’ compensation premiums moving forward and discuss strategies to improve your experience modification factor.
- 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. Through the utilization of fee schedules, employees can 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.