Workers' Compensation Costs Surge by 6% Annually over 4 Years

Desk report: Workers' compensation claim costs have steadily increased in recent years, with the average cost per claim rising by approximately 6% annually from 2022 to 2025, according to research by the Workers Compensation Research Institute (WCRI). This upward trend in claim severity emerges despite a long-term decline in claim frequency, presenting a mixed picture for insurers, employers and injured workers.

The WCRI's analysis, based on data from 18 states and claims through early 2024, shows that the total costs per claim, covering indemnity benefits for lost wages, medical payments and benefit delivery expenses, grew between 2% and 14% annually from 2021 to 2023 across the studied jurisdictions. The median state saw an average increase of about 6% per year over the 2022–2025 periods. Similarly, national data from the National Council on Compensation Insurance (NCCI) reveals a 6% increase in both medical and indemnity claim severity for accident year 2024 compared to the previous year.

Key drivers of rising workers' compensation costs

Several factors are driving this increase in claim costs, with medical inflation being a significant contributor. Notable annual increases in medical costs were observed in states like Wisconsin (6%), Delaware (7%) and California (5%) from 2021 to 2023. These increases stem from rising costs for professional services, hospital outpatient care, physical therapy and other non-hospital treatments. Additionally, updates to medical fee schedules in some states, which are tied to average weekly wages, have further contributed to rising medical costs.

Indemnity benefits, which replace a portion of lost wages, have also climbed, largely due to strong wage growth in the post-pandemic economy. As average earnings rise, so do the replacement payments for temporary total disability and other indemnity categories. NCCI data shows that indemnity severity increased significantly from 2022 to 2024, driven by wage pressures. Furthermore, the average number of workdays lost to injury has increased, now averaging around 80 days, further driving up the duration of indemnity payments and overall claim costs.

Complex claims and the rise of 'mega claims'

Claims are becoming more complex as a growing share of cases now involves cumulative trauma, mental health issues, or conditions related to an aging workforce. Although mental health claims represent only about 2% of all cases, they are 3.5 times more expensive and last 3.6 times longer than standard claims. Additionally, "mega claims", those exceeding $2 million or even $10 million in incurred losses, are increasing in frequency, particularly in high-risk industries such as construction, which contribute disproportionately to total loss amounts despite representing a small fraction of all claims.

Declining claims frequency offsets some cost increases

While claim frequency has declined by about 5% to 6% in 2024, according to NCCI estimates, this reduction has been driven by improved workplace safety, remote work arrangements and shifts in employment types. This reduction has helped offset some of the increases in claim severity. However, with fewer claims, fixed administrative and claims-handling expenses are spread across a smaller base, which pushes up the average cost per claim.

Insurance pricing and regulatory implications

These rising costs are influencing insurance pricing and regulatory decisions. In California, for instance, Insurance Commissioner Ricardo Lara approved an 8.7% increase in the advisory pure premium rate for 2025, citing growing medical losses, cumulative trauma claims and other cost pressures. Similar dynamics are prompting rate filings and discussions in other states. However, the broader workers' compensation market remains relatively competitive and profitable, with combined ratios around 86% in recent reports. Despite benefiting from reserve releases and favorable frequency trends, sustained severity growth could strain margins if not addressed.

Looking ahead: The future of workers' compensation costs

Experts anticipate that these trends will persist or even accelerate into 2026 and beyond. Medical inflation is expected to continue, with healthcare spending projected to grow steadily. An aging workforce poses higher risks of longer recovery times and more expensive treatments. Additionally, while advances in medical technology improve outcomes, they often come with higher costs. The rise in litigation rates and the emergence of more complex claims add additional layers of expense.

On a positive note, innovations like provider networks have shown the potential to reduce claim costs by up to 26% in some studies. These networks direct care toward more efficient, conservative treatments, shortening disability durations and improving cost outcomes.

Employers who invest in robust safety programs, early intervention strategies and return-to-work initiatives can help mitigate severity. Insurers, meanwhile, are increasingly turning to data analytics and utilisation management to control costs without compromising care quality.

The 6% annual rise in workers' compensation claim costs from 2022 to 2025 signals that the industry cannot rely solely on declining claim frequency to maintain financial stability. As the market evolves, stakeholders must find a balance between ensuring adequate protection for injured workers and maintaining sustainable pricing for employers. Continued monitoring by organisations such as WCRI and NCCI will be crucial in tracking whether this severity trend moderates or intensifies in the years to come. For now, the data underscores the importance of proactive claims management and targeted loss control strategies across the workers' compensation ecosystem.