Workers' compensation has entered a new era of rising severity, and the drivers behind that trend are no longer temporary or cyclical. The industry is now confronting a convergence of structural pressures that are pushing costs upward in ways not seen in more than a decade.

These forces — medical inflation, wage inflation, telelegal activity and demographic shifts — aren't operating independently. Instead, they're compounding each other, creating something of a perfect storm.

"The underlying issues, such as escalating medical costs, increased frequency and severity of claims — especially complex ones like cumulative trauma — and higher litigation expenses have reached a critical point," says Patrick Edwards, area senior vice president, Workers' Compensation practice leader, RPS.

Medical Inflation

The most visible of these pressures is related to the rising cost of medical care. After years of relative stability, medical cost escalation has returned with force. In fact, the average cost of an indemnity claim in California reached nearly $80,000 in 2024, a figure that has reshaped the risk landscape for carriers and insureds alike.

"Several factors are driving these costs," says L.J. Battagliese, area president with RPS. "One significant factor is the change in med-legal costs that occurred in 2021, where charges began to accumulate per page. These costs have surged significantly. Med-legal costs have increased by 30% over the past four years. The per-page medical record charges have given applicants' attorneys more leverage to escalate the costs of claims that used to be considered minor or nuisance claims."

Compounding the medical cost issue is a surge in cumulative trauma (CT) claims. These injuries, often resulting from repetitive stress, strain or prolonged exposure, now represent a historic share of claims activity. In fact, the percentage of indemnity claims involving cumulative trauma has reached an all-time high, now accounting for nearly a quarter of all indemnity claims. California leads the nation in this trend, but the rapid growth of CT claims is beginning to influence severity patterns in other states as well.

Wage Inflation

Rising wages increase indemnity benefits, which are calculated based on a percentage of an employee's pre-injury earnings. In states with higher minimum wages, this effect has been especially pronounced.

On the whole, wage inflation has significantly driven up indemnity claim costs, with California's minimum wage set to increase to $16.90 per hour starting January 1, 2026.

"Higher wages translate to higher indemnity benefits, creating additional financial pressure," says Amanda Ikari, area senior vice president with RPS. "Carriers now have to account for higher costs associated with lost time for injured employees who are unable to work."

That reality is now showing up in claim severity multipliers across numerous industries.

Legal Challenges

Then there is the legal environment, transformed by the so-called "telelegal revolution," which now enables attorneys to litigate claims virtually in some jurisdictions.

This shift has increased both the frequency and severity of litigated claims, making high-cost legal tactics more accessible than ever before.

An Aging Workforce

The fourth structural force contributing to severity growth is demographic: an aging workforce and the rise of the gig economy.

Younger workers are increasingly opting for flexible gig roles, leaving traditional industries with older employee populations. This shift leaves the older workforce in traditional roles, which tends to drive up costs due to higher injury rates and longer recovery times.

Older workers are more susceptible to severe injuries, recover more slowly and tend to require more medical interventions, all of which increase claim costs for employers and carriers.

These four forces are further interacting with post-pandemic utilization trends that continue to distort the claims environment. As medical offices reopened and workers returned to traditional job sites, deferred treatments and delayed diagnoses began flowing back into the system.

"Now we're seeing a more accurate reflection of post-COVID activity. In the cumulative trauma space, there's a concerning trend where some claims bypass treatment guidelines and use costly compounded medications. These tactics inflate costs significantly," says Mark Williams, area executive vice president, UW Work Comp Division at Atlas General Insurance Services, an RPS company.

This catch-up effect has further amplified the severity curves in many states.

Taken together, these pressures paint a picture of a market in transition; one where historical loss patterns no longer provide reliable guidance for future pricing. The structural nature of these forces means that severity is unlikely to decline on its own. Instead, carriers must adjust pricing models, underwriting practices and reserve strategies to reflect a fundamentally more expensive environment in workers' compensation.

Learn more about what's next for the Workers' Compensation insurance market in the 2026 Workers' Market Outlook.

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