California Workers' Comp Rates Up 8.7%

When Sarah Martinez opened her HVAC installation company in Ontario three years ago, workers' compensation costs felt like one expense she could count on staying stable. After years of rate decreases, her September 2025 renewal brought unwelcome news: an 11% cost increase. The notification explained that California Insurance Commissioner Ricardo Lara had approved an 8.7% jump in advisory pure premium rates, the first meaningful increase in over a decade. For Martinez, running five installation crews across the Inland Empire, this translated to an additional $4,200 in annual costs that weren't in her 2026 budget.

Martinez isn't alone. Thousands of California business owners received similar notifications this fall as the new $1.52 per $100 of payroll advisory rate took effect, up from approximately $1.40 in 2024. The timing caught many off guard precisely because rates had been decreasing or holding steady since 2012. Restaurant owners, contractors, manufacturers, retailers, and professional services firms all face the same reality: workers' compensation costs are climbing, and understanding why matters more than ever for budget planning and financial management.

Why a Decade of Decreases Just Ended

The 8.7% advisory rate increase, effective September 1, 2025, represents a fundamental shift in California's workers' compensation market. The Workers' Compensation Insurance Rating Bureau of California proposed an even larger 11.2% increase, but Commissioner Lara settled on 8.7% after reviewing data from multiple actuarial experts. While the rate is advisory, meaning individual carriers can set their own rates, industry analysts tell most California businesses to expect cost increases ranging from flat to plus-10% this year.

Several cost drivers converged to force this adjustment. Medical expenses have accelerated dramatically. According to Insurance Journal, medical costs per indemnity claim increased at just 3.7% annually between 2017 and 2023. That rate more than doubled to 7.7% between 2023 and 2024. Hospital care, surgical procedures, physical therapy sessions, and prescription medications all saw costs climb faster than general inflation, creating pressure that even medical cost containment measures couldn't offset.

The combined ratio reveals the full scope of the problem. This metric measures what carriers pay out for every dollar they collect. A ratio above 100% means they lose money. California's projected accident year combined ratio for 2024 hit 127%, the highest level in nearly 15 years. Translation: for every dollar collected, carriers paid $1.27 in claims and expenses. No business can sustain that math indefinitely, which is why actuarial experts unanimously agreed that meaningful rate increases were both justified and necessary.

The Hidden Factors Driving Costs Higher

Beyond medical inflation, two other trends are reshaping California's workers' compensation landscape. Claim durations have lengthened, meaning injured workers stay off the job longer than in previous years. Extended recovery periods increase indemnity costs, the wage replacement payments workers receive while unable to perform their duties. When a restaurant prep cook who earns $3,500 monthly stays out an extra four weeks, that's another $3,500 in costs that weren't projected when rates were set two years ago.

Cumulative trauma claims jumped sharply starting in 2021. Unlike acute injuries from a specific incident like a fall or equipment accident, cumulative trauma involves damage that develops over time. Carpal tunnel syndrome from repetitive motions, hearing loss from prolonged noise exposure, respiratory problems from chemical exposure, and stress-related conditions all fall into this category. These claims bring unique challenges:

• harder to document
• frequently disputed
• involve litigation
• cost more to resolve than straightforward injury claims

"Rate increases can significantly impact a business. But proactive management is the most effective way to weather these changes and protect both your employees and your bottom line."

This observation captures the dual reality business owners face: rising costs create real financial pressure, but businesses with strong risk management programs can minimize the impact. The statement highlights that rate increases aren't just abstract numbers, they're budget line items that affect hiring decisions, capital investments, and competitive positioning. Companies that treat workers' compensation as a managed expense rather than a fixed cost will handle this market shift more successfully than those that simply accept whatever costs arrive at renewal.

California's relatively high litigation rate compounds these pressures. More legal involvement means:

• higher attorney fees
• more medical-legal evaluations
• longer resolution times
• higher total claim costs

The system's complexity creates opportunities for disputes, and when injured workers hire attorneys, claim costs typically double or triple compared to claims settled without legal representation. These increased legal costs get factored into rate calculations, spreading the burden across all businesses.

What This Means for Your 2026 Budget

The real impact on your business depends on far more than just the 8.7% advisory rate increase. Your industry classification carries significant weight. Construction trades, manufacturing operations, restaurants, landscaping companies, and transportation businesses typically pay substantially more per $100 of payroll than office-based professional services. If you operate in a higher-risk classification, the percentage increase in your actual costs might exceed the advisory rate adjustment.

Your claims history matters enormously. Businesses with recent workers' compensation claims will see steeper increases than those with clean records. Your experience modification factor, or X-Mod, compares your actual claims history to the expected claims for businesses your size in your industry. An X-Mod of 1.0 represents average experience. Above 1.0 means worse-than-average claims history and higher costs. Below 1.0 indicates better-than-average experience and lower costs. Each claim you file can impact your X-Mod for three to five years, creating a long tail of financial consequences from a single incident.

"The reality is you can't control the market."

This simple statement carries profound implications for how business owners should approach cost management. The contractor's words remind us that external market forces, regulatory decisions, and industry-wide cost trends sit outside any individual business owner's sphere of influence. Fighting against the market or complaining about rate increases wastes energy that could be directed toward factors businesses can control: safety programs, claims management, employee classification accuracy, and payment structures. The businesses that thrive accept market realities quickly and focus their efforts on optimizing what they can actually change.

Cost timing creates additional variability. Businesses with policies that renewed before September 1, 2025, locked in rates under the old advisory structure, giving them several months before facing higher costs. Policies renewing in late 2025 or early 2026 will reflect the new rate environment immediately. For a contractor with $500,000 in annual payroll in a moderate-risk classification, moving from $1.40 to $1.52 per $100 of payroll represents at least $600 in additional base cost before experience modifications, schedule credits, or other rating factors apply.

Discount structures are also changing. The California Department of Insurance noted that carriers have been applying schedule rating credits and other discounts averaging above 30% even as projected combined ratios deteriorated. Expect carriers to reduce these discounts going forward. If your account currently includes a 25% schedule credit and your carrier cuts that to 15%, you're effectively facing a cost increase well above the 8.7% advisory rate adjustment even before the base rate change factors in.

Practical Steps to Manage Rising Costs

While you cannot change the commissioner's rate decision, you control several factors that determine your specific costs. Start with employee classification codes. Every job gets assigned a numerical code reflecting its risk level. Misclassifications cost money. If an administrative assistant performing desk work is mistakenly classified in a higher-risk category, you're overpaying. Review classifications annually with your agent or broker. As job duties evolve, classifications should update accordingly.

Payroll reporting accuracy protects your budget. Costs calculate based on every $100 of covered wages, so overstated payroll means unnecessary charges. Understand which compensation elements count toward workers' compensation calculations and which don't. Tips, employee retirement contributions, and certain benefits typically aren't included. Overtime calculations follow specific rules. Small errors compound over a full policy year, potentially adding hundreds or thousands to your final costs at audit.

Claims management delivers multi-year value. High reserves on open claims inflate your experience modification factor immediately and continue affecting costs for years after claims close. Work closely with injured employees to facilitate safe return-to-work programs. Modified duty arrangements that bring workers back in limited capacities reduce indemnity costs dramatically compared to keeping employees fully off work. The faster someone returns to any productive work, the lower your claim costs and the better your future X-Mod.

Safety programs earn discounts and prevent claims. Carriers reward documented commitments to workplace safety. Regular safety meetings, proper equipment maintenance, training programs, and cultures that prioritize injury prevention all contribute to lower costs. Beyond financial savings, preventing injuries protects your employees, maintains productivity, and avoids the hidden costs of accidents:

• lost time
• reduced morale
• potential OSHA fines
• damaged reputation

Business owners can explore workers' compensation coverage options that align with their specific industry risks and operational needs.

Payment flexibility helps cash flow. Some carriers offer pay-as-you-go programs aligning payments with actual payroll cycles rather than requiring large upfront deposits. This approach particularly benefits businesses with seasonal employment fluctuations. You pay based on each payroll period's actual wages, avoiding the estimate-true-up-audit cycle that can produce year-end surprises. For many businesses, improved cash flow management justifies any small administrative fees these programs might carry.

Why This Increase Matters Beyond Your Immediate Costs

California's rate adjustment reflects broader market dynamics affecting workers' compensation in multiple states. North Dakota, Connecticut, Colorado, and Washington all approved rate increases in 2025, driven by similar pressures:

• wage inflation
• medical cost acceleration
• increased claim severity

The pattern suggests a fundamental market shift rather than a California-specific anomaly. After a decade of decreasing rates and intense carrier competition, the market is correcting to reflect actual claim costs.

"We must be proactive in analyzing and addressing these early warning signs of a shift in market conditions in order to foster a competitive marketplace."

Commissioner Lara's statement, reported by the California Department of Insurance, reveals the regulatory philosophy behind the rate increase approval. His use of "early warning signs" signals that he views this adjustment as preventive rather than reactive, catching problems before they escalate into a full market crisis. The phrase "competitive marketplace" acknowledges that if rates stay artificially low and carriers lose money, they'll exit California, reducing competition and ironically making coverage more expensive and harder to obtain. The commissioner's words frame this rate increase as medicine that tastes bad but prevents worse problems down the road.

Understanding these cycles helps business owners make better decisions. Advisors who grasp the underlying economics can explain why costs rise rather than leaving clients frustrated and confused. Carriers weren't overcharging during the years of rate decreases. They were competing aggressively for market share, sometimes accepting marginally profitable or unprofitable business. That strategy works temporarily but cannot sustain itself long-term. When combined ratios stay above 100% for multiple years, the financial reality forces correction.

California's workers' compensation reforms implemented over the past decade created meaningful improvements. The system today functions far more efficiently than in the early 2000s when rates peaked at unsustainable levels. This increase addresses emerging cost pressures while maintaining a structure that provides necessary benefits to injured workers without returning to the problematic conditions that prompted the SB 863 reforms.

Industries with higher physical risk face compounding challenges. Contractors, for instance, already manage complex requirements across multiple areas. Workers' compensation joins general liability, commercial auto, tools and equipment protection, and often professional liability in creating substantial ongoing costs for construction businesses. Similar to specialized needs for HVAC contractors, each trade faces unique risk profiles that get priced according to historical loss data for those specific classifications.

Building Long-Term Cost Control

Successful business treat workers' compensation as an ongoing management priority rather than an annual renewal task. Workplace safety requires continuous attention throughout the year. Regular safety meetings keep awareness high. Equipment maintenance schedules prevent mechanical failures that cause injuries. Training programs confirm employees understand proper techniques for their specific tasks. Creating a culture where workers feel comfortable reporting near-misses allows businesses to address hazards before they cause actual injuries.

Documentation systems prove your commitment to safety when carriers evaluate your account. Written safety policies, training attendance records, inspection checklists, and incident investigation reports all demonstrate proactive risk management. When renewal time arrives, this documentation supports requests for schedule credits or favorable underwriting treatment. Carriers prefer businesses that actively work to prevent losses over those that treat workers' compensation as a passive compliance requirement.

Return-to-work programs deliver measurable value. Businesses that proactively create modified duty opportunities for injured workers reduce indemnity costs substantially. Even simple accommodations like providing a stool for a worker who normally stands or temporarily reducing lifting requirements can enable an employee to return productively while still recovering. The sooner workers return to any productive activity, the lower the financial and psychological costs of their injuries. Reviewing your business needs annually helps confirm your approach keeps pace with your operations.

Your agent or broker relationship matters more during market shifts than during stable periods. A knowledgeable professional can explain rate changes, identify cost control opportunities, and market your account effectively to multiple carriers. They should review your classification codes annually, suggest safety improvements that earn credits, and help you understand how specific claims will affect future costs. Don't wait for an unexpected renewal increase to engage with your advisor. Proactive conversations several months before renewal create time to implement improvements that positively impact pricing.

Moving Forward in a Changing Market

The 8.7% advisory rate increase represents significant change, but context matters. After a decade of rate decreases that left carriers paying out more than they collected, this adjustment addresses fundamental market imbalances. Business owners who understand the drivers behind rate changes can make informed decisions rather than simply reacting with frustration. The increase is substantial but not catastrophic, especially compared to workers' compensation rate environments in the early 2000s when California's system faced genuine crisis conditions.

Your response to these changes determines their ultimate impact on your business. Accepting rate increases as inevitable without examining your risk management practices means paying more unnecessarily. Every dollar you spend on effective workplace safety, proper employee training, and proactive claims management reduces your long-term workers' compensation costs. The businesses that fare best in any market cycle are those treating risk management as a core operational priority rather than a compliance checkbox.

Market cycles eventually turn. Today's rate increases won't continue indefinitely. As carriers return to profitability, competition will again exert downward pressure on pricing. But businesses with poor safety records and high claims frequencies won't benefit from future rate decreases as much as those with strong risk management programs. The decisions you make now about workplace safety and claims handling will affect your costs for years, regardless of where base rates move in the broader market. Taking time to assess your current situation confirms you're properly positioned as market conditions shift.

Protecting your commercial business requires coverage tailored to your specific industry and risks. Contact Farmers Insurance - Young Douglas for a free consultation on commercial solutions designed for California businesses, including workers' compensation, commercial general liability, business property, and commercial auto coverage.

Sources

• Insurance Journal: "Viewpoint: California Workers' Comp Outlook And What Stakeholders Need to Know"
• California Department of Insurance: "Commissioner Lara alerts state leaders to growing costs in California's workers' compensation system"
• ADP Spark Blog: "Rising Workers' Compensation Rates: 5 Ways to Protect Your Business Now"

Disclosure: This article may feature independent professionals and businesses for informational purposes. Farmers Insurance - Young Douglas collaborates with some of the professionals mentioned, however, no payment or compensation is provided for inclusion in this content.