State of California’s Workers’ Compensation Market
The current workers’ compensation market in California continues to remain relatively soft as it has for several years. However, the outlook is one of projected change as the market is expected to harden. To advise for the coming years, we’ve planned a series of articles to look at the current state of California workers’ compensation market, the forecasted changes to the market and the forces driving that change, as well as solutions and alternatives to best position your business for the new workers’ compensation landscape in California.
Soft Market Expected to Change
High policy capacity and nominal or even non-existent rate increases have contributed to California’s soft workers’ compensation market. Despite regulatory increases and expanded coverage, the workers’ compensation market has been profitable for insurers and is expected to remain so for the short-term. However, expectation is that the market will self-correct to reach equilibrium in the near future, and premiums will increase significantly. With the predicted changes in the market, we are in a unique spot to proactively position your business and its workers’ compensation coverage to protect both your company and its employees.
The Effect of Medical Costs and Inflation
Major factors contributing to significant changes in the California workers’ compensation market are increased medical costs along with inflation. So far, as medical costs have increased, claim frequency declines and rising wage levels have offset additional medical expenses. However, here in California, our medical fee schedule values are expected to go up in correspondence with Medicare value increases due to the largest rate hikes in state history.
Inflation is also causing medical rates to increase at a higher-than-average pace, forcing the price of medical treatment to rise exponentially. Rising costs of treatment will drive up the overall expense of claims, consequently increasing the cost of workers’ compensation coverage. Again, when the forces that have previously mitigated cost increases – declining claim frequency and increased wage levels – will no longer effectively lower the overall rates as they have done so previously, the cost of workers’ compensation will climb commensurately.
Other contributing medical factors include the national healthcare worker shortage. As injured workers experience longer waits to receive the care they need, recovery times lengthen and returns to work are delayed. The result is increased workers’ compensation claim values through the cost of lost wages and work. Combined with the double effect of increased medical costs and a higher-than-average rate of inflation, the expectation is a significant increase in workers’ compensation premiums.
Construction Trends
With improved safety efforts and increased mechanization in the construction industry, it is forecast that claim frequency will continue to decrease at the same rate it has prior to the pandemic. While this could have a positive impact on the cost of workers’ compensation, other factors are expected to meaningfully negate the effects of this trend.
The construction industry continues to see historic labor shortages. In response, construction companies have raised base wages and broadened benefits to recruit workers. Such increases drive up the overall expense of projects, and are more costly in terms of lost wages covered through workers’ compensation claims. Additionally, as wage levels increase, so do indemnity costs.
Moreover, despite the easing of pandemic-driven supply chain disruptions, material prices remain at historic highs, again pushing up the overall costs of projects. Unfortunately, material prices do not show signs of coming down, and the general increases affect workers’ compensation costs.
Conclusion
While we have been in a good position for the last several years, the predicted changes in California’s workers’ compensation market warrant forethought and action. Going forward, we’ll look at ways to optimize risk and claims management, as well as alternative solutions to mitigate the rising costs of workers’ compensation coverage.
