Written by Chris Davis for Insurance Business. Shared with permission.
Aging workforce, wage inflation and litigation pressure are reshaping carrier appetite and pricing dynamics
Key Takeaways
- Labor shortages and wage inflation are shifting workers’ comp exposures, affecting how risks are priced and underwritten.
- Medical costs and litigation trends are pushing rates higher, with California leading the way.
- Carrier appetite is tightening for riskier classes, making placement strategy more important than ever.
Ongoing labor shortages, rising wages, and regional litigation spikes are converging to reshape the U.S. workers’ compensation market – squeezing carrier margins, shifting underwriting appetite and prompting new pricing strategies.
“I anticipate that we will continue to see ongoing labor shortages as a result of the continuing demographic shift, primarily as an outcome of an aging workforce,” said Becky Pinto, president of Arrowhead’s Workers’ Compensation Division.
That demographic shift is accelerating employer interest in automation and robotics to maintain productivity. Pinto noted these technologies will not only offset manual labor gaps but also reshape comp exposure. “In some industries, automation and the use of robotics will reduce risk and will create a reskilling of the workforce,” she said. That shift, in turn, has a downstream impact on pricing. “Workers’ compensation premiums are remuneration-based. As the workforce continues to reskill, it could increase wages due to a higher-skilled workforce in certain industries.”
Related: Workers’ compensation trends: What agents need to know
Premium erosion meets rising medical costs
While higher wages may help prop up premium totals, they are not enough to offset a broader trend of premium decline – especially in California. Pinto pointed to a decade-long slide in total premium volume that began in 2015. “This year, the WCIRB did indicate an 11.2% increase in pure premium rates, which, to be honest, is needed,” she said.
The Workers’ Compensation Insurance Rating Bureau (WCIRB) of California projected a 4.8% wage trend increase in 2025 and 4.1% in 2026. Pinto said these gains may outpace general inflation, helping to stabilize premium levels. “Per publications I have read, economists are anticipating overall inflation to be under 3%. Wage inflation outpacing general inflation is a positive outcome, and again, that leads to higher premiums.”
Still, she warned that severity trends are escalating, particularly in relation to medical services and treatment costs. “We are seeing severity trends increase and driving factors include, medical service costs, physicians, physical therapy, to name a few, and ALAE severity increases, which are largely driven by increased attorney involvement,” she said.
Related: A practical guide to reducing on-the-job injuries
Carrier response remains uneven
According to Pinto, the market is beginning to harden – especially for riskier or poor-performing accounts. “We would expect to see a firming of the workers’ compensation market, meaning rate increases,” she said. However, carrier appetite remains segmented. “Generalists writing main street business and well-performing risks will probably continue to see reasonable rates, maybe decreases to flat. Whereas your heavier exposures or poorer performing accounts are going to probably start seeing some increases.”
California continues to lead regulatory and pricing trends. Pinto said the Department of Insurance was expected to respond to the WCIRB’s rate filing by mid-July, and that any decision would likely send a broader message. “California often sets the pace for new trends, thanks to its position as the world’s fourth-largest economy globally,” she said.
Classifying gig workers adds complexity
The growing prevalence of gig and hybrid workforces has introduced fresh compliance challenges for underwriters. “There has to be more scrutiny around the gig worker, independent contractors, etc.,” said Pinto. She stressed the need for underwriters with strong classification discipline and familiarity with state-level tests. “Back in September 2019, our governor signed California AB5, which basically implemented what is called the ABC test. The intent was to create a clearer, more uniform standard for classification, making it easier for all parties – employers, workers and regulators – to understand and apply.”
That legislation clarified contractor classification and was followed by SB 216, which expanded coverage mandates for licensed contractors. “There are five CA contractors’ licenses (C-8, C-20, C-22, C-39, & D-49) that require workers’ compensation right now, whether they have employees or not. It’s important to note that the rule already existed for Roofers (C-39) prior to SB216,” she said.
Related: When’s a worker an employee vs. contractor
Litigation and claim severity reshape models
California’s regional litigation disparities are forcing further refinements in pricing and underwriting. “Litigation trends are not slowing,” Pinto said. “And Los Angeles is the most litigious region in the state.” Carriers are increasingly leaning on ZIP code-level data from the WCIRB and their own claims histories to revise filings and recalibrate rate adequacy.
Brokers are also being tested at renewal. Pinto said that while claim frequency remains relatively stable, the spike in claim severity is driving more significant rate tension. “We’re just seeing a very mild uptick in frequency, but the real focus is what’s going on with the severity-driven claims.”
AI tools won’t replace underwriters – but they’ll define the winners
Technology is emerging as a critical lever, not a threat. Predictive pricing tools and large language models are playing a larger role in how carriers evaluate and price risk – especially in the small to mid-market space.
“I don’t think this will replace the underwriter role. I think it will enhance and intensify it,” Pinto said. These tools are enabling faster risk selection and improving pricing efficiency, but complex accounts still require human judgment. “Larger, more complex businesses will require a more seasoned, experienced underwriter,” she said.
Pinto ended with a blunt assessment for firms lagging on digital adoption: “If we’re not moving forward and using the technology at our fingertips, we will be left behind.”
Note: This article was written, and the interview conducted, ahead of the CA DOI announcement of the approved 8.7% increase.
This material has been prepared for general informational purposes only, is intended to apply generally rather than to any specific company and presumes appropriate discretion will be exercised regarding any particular situation.
Arrowhead General Insurance Agency, Inc. | CA License #0699809