The US workers’ compensation market is expected to remain profitable with continued rate softening through 2026. However, that broad trend masks a growing divergence at the state level.
While most employers can still expect modest rate decreases, certain states are showing early signs of market firming, carrier pullback, and even potential rate increases as profitability erodes.
“We’re still in a very profitable workers’ compensation environment overall,” said Tim Palmer (pictured), managing director of workers’ compensation at Novatae Risk Group.
“But when you look at individual states, particularly California, New York, Massachusetts, and Illinois, we’re starting to see pressure build that’s going to lead to localized rate changes more quickly than the national cycle would suggest.”
Historically, workers’ comp has followed fairly predictable cycles, with California often leading a national trend reversal. However, Palmer believes the current environment will be different. Rather than one large national shift, pockets of firming will emerge based on regional legislative, economic and loss conditions.
“In prior market cycles, California would start to go up and then the rest of the country would follow over 18 to 24 months,” he said. “This time, I think carriers have gotten smarter and more disciplined. They’re adjusting pricing by state, not just nationwide.”
California is already showing signs of tightening, with rate increases in the flat to +5% range. New York, where state-mandated rate decreases have compressed profitability, is seeing some carriers reduce capacity or exit certain classes entirely. Massachusetts, despite not being a large workers’ comp market, has driven rates so low that “carriers are saying, we can’t attain profitability, so we’re not going to write in that state,” Palmer said. Illinois is also trending toward deterioration, with rising loss costs and political pressure on pricing.
Palmer expects this trend to accelerate into 2026. “We’ll continue to see overall rate decreases,” he said. “But instead of double-digit drops, we’ll see more states come out with low single-digit decreases, and a few will begin posting rate increases.”
The biggest factor eroding profitability? Medical inflation. Large claims are growing faster than ever, driven by specialty drugs and advanced medical treatments that improve survival rates but increase long-term care costs. Compounding the issue: claims are staying open longer, and litigation is increasing.
Palmer said the aging workforce is a significant component to this trend. “Some injured workers aren’t going back to work, and that’s driving larger settlements and more litigation,” he told Insurance Business.
To counter rising claim severity, carriers and TPAs (third-party administrators) are increasingly focused on medical management and data-driven interventions.
“They’re trying to direct care as much as they can,” Palmer said. “The medical bill review process is becoming a stronger part of programs.” Some carriers are shifting away from charging a percentage of bill review savings, instead passing along those savings to insureds as a differentiator.
At the same time, risk mitigation technology, particularly wearable safety devices, is gaining traction. As artificial intelligence and predictive analytics evolve, these tools are expected to further reshape claims strategies and underwriting.
“Insureds that buy into it are seeing a significant impact on loss results,” Palmer said. “It produces more awareness for employees and has a major impact on the cost of insurance. Carriers are able to pass along rate savings because of those wearable devices.”
The soft market is also influencing how employers structure their programs, with more and more insureds looking at guaranteed cost programs. The cash flow benefits of loss-sensitive programs have diminished as rates have dropped, making guaranteed cost more attractive for budget certainty.
“Where in the past, if you had a million dollars in premium, you automatically looked at loss-sensitive programs, now those same insureds with $1 million to $3 million spend are moving back to guaranteed cost,” Palmer said.
Meanwhile, insureds with strong loss control are still exploring higher retentions as a way to secure savings.
Looking ahead, Palmer predicts the workers’ comp market will continue its slow, steady softening through 2026, but with less aggressive rate decreases and more volatility in certain jurisdictions. For brokers and insureds, this indicates that the era of uniform reductions is coming to an end. As states diverge, localized market expertise, proactive claims, and safety strategies will be critical to staying ahead.
“We’ll keep seeing rate decreases,” Palmer said. “But instead of double-digit decreases, we’ll start to see single-digit reductions. And in a couple of states, we may even see single-digit rate increases.”
