A View Into the Workers' Compensation Market

Workers' Compensation insurance continues to be a standout in the insurance world, having experienced average state-approved advisory rate reductions for the last decade. Whether the market will change moving forward remains to be seen, as wage growth, medical inflation and other factors all impact the Workers' Compensation market.

Wage Growth Is Driving Payroll Growth

Wage growth continues to drive payroll growth in Workers' Compensation. According to a report by the National Council on Compensation Insurance (NCCI), while wage growth has moderated from its peak in 2022, it remains solidly above pre-pandemic growth rates and is positioned to stay elevated in 2024.¹ Several factors are behind the continued wage growth, according to the NCCI, including union activity and newly negotiated contracts, higher minimum wages and inflation.

2022 saw a big spike in hiring and wages post-COVID, as many industries experienced labor shortages in the aftermath of the pandemic. However, hiring leveled off in 2023, with layoffs in specific sectors —such as tech — causing payroll growth to dip.

According to the Department of Labor, employment rose by 3.1 million in 2023, significantly below the 7.3 million jobs added in 2021 in the wake of COVID and the 4.8 million added in 2022.² Still, job growth for 2023 was higher than the average of the previous five years (2.3 million) before the pandemic. Initial job estimates for 2023 were 2.7 million, later revised to 3.1 million.

Moving ahead, high inflation and minimum wage increases across numerous states continue to paint a healthy picture for payroll growth in 2024. According to the Economic Policy Institute (EPI), on January 1, 2024, 22 states were set to increase their minimum wages, raising pay for nearly 10 million workers.³ The EPI projects that state minimum wage increases will result in an additional $6.95 billion in worker income.

Furthermore, on January 1, 2024, 38 cities and counties raised their minimum wages above their state's wage floors, increasing the number of workers likely to earn more. For example:

• In Illinois, workers saw an increase in the minimum wage from $13 to $14 per hour beginning in January, with another increase expected in 2025.
• In California, the minimum wage for fast food workers rose to $20 per hour effective April 1. That's $4 higher than the overall state minimum wage of $16 that went into effect January 1.
• As of June 2024, healthcare workers in California earn a minimum of $18, $21 or $23 an hour, depending on the type of facility that employs them and where they work.

Meanwhile, California workers in other industries are asking for an increase in wages. In Los Angeles, for example, a proposed ordinance would institute a $25 minimum wage for workers in the tourism industry before the 2026 World Cup and the 2028 Olympics, which would rise to $30 an hour by 2028.⁴

The Challenges of Medical Inflation

Medical inflation continues to challenge insurers and claim costs, which is also underscored in NCCI's annual survey of carriers. As medical costs rise, carriers are worried about frequency, severity and large claims.

Over the short term, the market will weather the higher medical costs; However, along with wage legislation and general inflation, which increase indemnity payments, the long-term impact is concerning.

Workers' Comp Pricing

Of course, accounts with significant wage growth see premiums rise. In addition, pricing is tightening in certain states. California, New York and New Jersey, for example, are adjusting rates only slightly downward due to higher claim costs driven by litigation and medical inflation. However, many other states have issued double-digit rate reductions this year, including Florida and Arizona.

In addition, some carriers are exiting certain classes where rate adequacy is insufficient and profitability isn't where it should be. The good news is that the market has a lot of capacity to place these accounts when carriers' appetites change.