NEW YEAR, NEW INSIGHTS ON WORKERS’ COMP. & EPLI TRENDS

As we step into 2025, the insurance landscape for workers’ compensation (WC) and Employment Practices Liability Insurance (EPLI) is rapidly changing. In this article, we’ll discuss rate indications, key trends, and strategic considerations to help you prepare for the coming year.

RATE INDICATIONS: A DIVERGENT TRAJECTORY

The current rate environment presents contrasting narratives for WC and EPLI, challenging businesses to adopt tailored risk management strategies.

The workers’ compensation market continues its decade-plus run of profitability, with the latest NCCI’s State of the Line report estimating that the industry net combined ratio amongst private carriers has remained relatively stable around 86%. Frequency continues to decline or remain flat while severity continues to increase, with the net effect still being downward movement. As a result, most states are announcing continued rate decreases in the 2-7% range. Exceptions at the time of this article’s writing include Washington State which announced a 3.8% increase for January 2025.

The EPLI market presents a more challenging picture, with businesses continuing to face flat to increasing rate renewals, with larger increases in California, New York, New Jersey, Illinois, and Florida, and industries such as retail, hospitality, and healthcare. Retentions have largely stabilized from two or three years ago but we continue to see insurers focusing on stricter underwriting standards and separate retentions to mitigate risks.

KEY TRENDS SHAPING RATE MOVEMENT

With the disparate stories underlining WC and EPLI markets, it is no surprise that key trends driving those markets also differ.

In WC, the question remains “How long can these rate decreases continue?” Many, including this author, thought that the pandemic would usher in a hard market. Yet the pandemic resulted in a blip in the WC market, with rate decreases continuing post-pandemic. Given how strong combined ratios and associated investment returns have been, rate decreases appear likely to continue into the near future. That said, there are key trends to observe and monitor that may change that trajectory sooner than expected.

First, medical costs spiked temporarily at the beginning of 2024 per NCCI only to return to a more recent average of around 3%. Hospital inpatient and outpatient care along with durable medical equipment continue to be cost drivers to monitor. Second, as strong as investment returns have been over the last two decades, NCCI’s recent 8.6% estimate of investment return for 2022 is amongst the lowest over the same period. While pretax operating gain, which combines underwriting income with investment income, is still amongst the highest over the last two decades, a material drop in investment income could instigate a change in trends.

EPLI claims continue from recent drivers, including discrimination, harassment, accommodation and related retaliation claims. Further, the changes in DEI policies and even the elimination of entire departments moving forward could impact claim frequency and/or severity. Large organizations such as McDonalds, Walmart, and Meta have recently announced reductions in their DEI initiatives and more notably a recent Executive Order by President Trump announced sweeping changes to DEI programs. Last but not least, employers are increasingly adopting artificial intelligence in their hiring and other practices, such that a recent EEOC report notes up to 99% of Fortune 500 companies now utilize some form of automated screening tool. Regulation of such tools are consequently on the rise.

Strategic Next Steps

To navigate these evolving markets effectively, businesses should prioritize the following strategies:

Enhance risk management practices for workers’ compensation by adopting proactive safety programs and collaborating with insurers to help identify emerging trends that could impact premiums. For EPLI, evaluating workplace policies and implementing training programs can address risks related to AI and discrimination.

Collaborate with actuaries, brokers, and insurers to identify cost drivers and make informed decisions about risk transfer and/or mitigation. Ensure your insurance program and structure is tailored to your industry-specific or geographic risks.

Invest in technology and analytics to proactively address and thus potentially mitigate risk.

Consider alternative risk solutions by using captives or self-insured retentions (SIRs) can give businesses greater control over claims management and reduce reliance on traditional insurance models.

The workers’ compensation and EPLI markets are navigating through distinct trajectories, requiring businesses to adopt nuanced strategies. Staying abreast of the changing environments and employing the aforementioned strategies will collectively help businesses thrive in these dynamic and challenging times.