Insurance Handbook

What is workers compensation?

Workers compensation insurance provides for the cost of medical care, rehabilitation, and wage replacement for injured workers and death benefits for the dependents of persons killed in work-related accidents. In recent years, it has been the most profitable property/casualty line of business.

With workers compensation, an employee gives up the right to sue the employer for injuries caused by the employer’s negligence and in return receives benefits, regardless of who or what caused the accident, if it happened in the workplace because of and in the course of workplace activities.

Workers compensation systems vary from state to state. State statutes and court decisions control many aspects, including the handling of claims, the evaluation of impairment and settlement of disputes, the amount of benefits injured workers receive and the strategies used to control costs.

Recent facts on workers compensation

• According to the Bureau of Labor Statistics (BLS), private industry employers reported 2.6 million nonfatal workplace injuries and illnesses in 2021, a decrease from 2.7 million in 2020. Additionally, total fatal work-related injuries stood at 5,190 in 2021.
• According to NCCI’s State of the Line analysis:
  • In 2022 workers compensation premiums for private carriers and state stood at $42.5 billion up from $38.5 billion in 2021.  
  • From 2019 to 2022, the workers compensation line experienced the smallest premium growth of 1.1 percent, with net written premium now past the pre-pandemic levels of 2019. Total P&C net written premium for private carriers increased by 21.6 percent from 2019 to 2022.
  • Premium for the residual market (NCCI-serviced workers compensation residual market pools) has stood at approximately $1 billion for the past several years, with small year-over-year declines since 2015. 2019 and 2020 experienced more significant decreases of 15.5 percent and 7.6 percent, respectively, falling under $1 billion.
• In 2020, about 135.57 million workers were covered by workers compensation in the United States.

History of workers compensation

The industrial growth that took place in the United States during the 19th century was accompanied by a significant increase in workplace accidents. At that time, the only way injured workers could obtain compensation was to sue their employers for negligence. Proving negligence was a costly, time-consuming effort, and often the court ruled in favor of the employer. But by the early 1900s, a state-by-state pattern of legislative proposals designed to compensate injured workers had begun to emerge.

Wisconsin enacted the first permanent workers compensation insurance law in 1911 (New York had enacted a law a year earlier but it was found unconstitutional). By 1920, all but eight states had enacted similar laws. By 1949, all states had a workers compensation system that provided compensation to workers hurt on the job, regardless of who was at fault. The costs of medical treatment and wage loss benefits were the responsibility of the employer which were paid through the workers compensation system.

The scope of workers compensation coverage has broadened considerably since its beginnings. In 1972, states amended their laws to meet performance standards recommended by the National Commission on State Workmen's Compensation Laws. Many states acted not only to expand benefits, but also to make the coverage applicable to classifications of employees not previously covered.

How does workers compensation work?

Employers can purchase workers compensation coverage from private insurance companies or state-run workers agencies, known as state funds. According to a Conning study, “Workers Compensation State funds, Evolution of a Competitive Force,” 20 states have funds that compete with private insurers. In four states, the state is the sole provider of workers compensation insurance. Along with residual market pools, many state funds function as the insurer of last resort for businesses that have difficulty getting coverage in the open market.

Some businesses finance their own workplace injury benefits through a system known as self-insurance. Large organizations with many employees can often estimate the cost of routine types of injuries. Self-insurance, along with large deductibles (effectively self-insurance) account for more than one-third of traditional market premium.

How does the government manage workers compensation?

Workers compensation systems are administered by the individual states, generally by commissions or boards whose responsibility it is to ensure compliance with the laws, investigate and decide disputed cases, and collect data. In most states employers are required to keep records of accidents. Accidents must be reported to the workers compensation board and to the company’s insurer within a specified number of days.

To rein in expenditures and improve cost effectiveness, many states have adopted cost control measures, including treatment guidelines that spell out acceptable treatments and diagnostic tests for specific injuries such as lower back injuries and fee schedules that set maximum payment amounts to doctors for certain types of care.

Most states pay benefits for the duration of the injury, but some specify a maximum number of weeks, particularly for temporary disabilities. For workers with a total disability, the benefit amount is some percentage of the worker’s weekly wage (actual or state average). Cash benefits may not be paid until after a waiting period of several days.

What does workers compensation cost employers?

Costs to employers include premiums, payments made under deductibles, and the benefits and administrative costs incurred by employers that self-insure or fund their own benefit program. The percentage of total compensation costs that workers compensation premiums represent fluctuates.

There is a wide variation in costs among states and industries, so that the highest rated (the inherently riskiest) groups could pay several hundred times that of the lowest rated (safest) groups, as a percentage of payroll. Also considered is the firm’s own safety record.

How can workers compensation costs be reduced?

Workers compensation system costs are rarely static. Reforms are implemented and then, over time, one or more element in these multifaceted systems get out of balance. Soon employers and legislators complain that the cost of coverage is hurting the state’s economy by reducing its ability to compete with other states for new job-producing opportunities.

Research shows that the faster the insurer receives notice of an injury and can initiate medical treatment, the faster the injured worker recuperates and returns to work and the less likely they are to seek out an attorney for help in dealing with a claim.

There are two important aspects to facilitating the return-to-work process: First, getting the most effective medical care as soon as possible and reducing the emotional stress that may follow an accident; and second, improving communications about the workers compensation system before accidents.

Attorneys and workers compensation

Another factor pushing up costs of workers compensation in some states is attorney involvement. Workers compensation programs were originally intended to be "no-fault" systems and, therefore, litigation-free.

However, a 2018 study found that of 50,840 claims 14,183 involved attorneys, giving an overall attorney involvement rate of 28 percent. Additionally, the research noted that litigated workers comp claims were 388 percent more expensive than non-litigated claims. Claims also took considerably longer to close.

The involvement of an attorney does not necessarily indicate formal litigation proceedings. Sometimes, injured workers turn to attorneys to help them negotiate what they believe is a confusing and complex system.

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