The rate at which specialty firms are growing in size is significant, putting pressure on many smaller, independent firms, even those with traditionally strong growth. These large consolidating firms gain greater market clout as they often have superior economies of scale, increased market share, enhanced resources and capabilities, a wider variety of client offerings, and stronger competitive positions.
Given the robust, buy-side interest in specialty firms and the rampant consolidation that has come as a result, the number of specialty firms is dwindling, with the space becoming dominated by a smaller number of larger firms. As an example of this consolidation – in 2009 the market had approximately five specialty firms with $1 billion or more in property & casualty (P&C) premium. In 2024, that number has exploded to more than 28 firms over this threshold, of which eight have at least $5 billion in premium and the top three over $25 billion. Currently, the top ten specialty firms control approximately 70% of all specialty P&C premium in the marketplace.
The shift towards consolidation and larger firms
While drivers of this consolidation trend include client preferences, economies of scale, technology, and access to capital, the primary driver is the inefficiencies in the overall distribution system. By coming together, firms increase negotiating power with their carrier partners, and they also diversify. This trend is very capital motivated. Given the growing presence of private equity (PE) in the space, the push to generate returns, is, by its nature, squeezing out inefficiencies and maximizing the benefits that size creates. PE has been, and will likely continue to be, a significant driver of the consolidation seen in the specialty sector.
Major ancillary benefits of consolidation include the market clout and diversification of what tend to be highly concentrated businesses when an independent organization sells to larger organizations. Across many industries, there’s been a tendency for industries to consolidate over time. For example, the U.S. auto industry only has three major manufacturers in 2024, compared to 250 in 1920.
The rate of consolidation of specialty firms is brisk compared to their retail broker counterparts. Specialty firm acquisitions have consistently outpaced retail distribution acquisitions for several years. In 2024, as a percentage of the total number of firms in each segment, 7.1% of specialty firms were acquired versus 2.6% of retail firms – nearly a 3x faster consolidation rate. Some of the largest specialty brokers are growing at a compound annual growth rate (CAGR) of 20%.
How are the largest firms achieving their growth and creating value?
How are they doing it? By leveraging market clout. Firms are creating this clout and value in a number of ways, including: Taking on growth capital to fuel strategic initiatives (like mergers and acquisitions); reinvesting in people and underwriting talent to improve risk assessment, pricing and profitability; effectively utilizing technology to automate processes; and developing niches and diversifying their operations.
There are potential industry-level market dynamics to note. Due to consolidation trends and historically high valuations, some brokers have become very large, placing tens of billions in premium each year. Notably, this level of premium is often larger than their risk-providing carrier partners. This dynamic, which has emerged over the last decade, has put more operating leverage in the hands of the brokers when negotiating with carriers.
Large brokers are leveraging this advantage in order to access capacity, negotiate higher commissions, and put in place or enhance contingency and profit-share arrangements. This provides brokers more resources and capital to reinvest into value-add services, technology, and people. This also puts independent insurance distributors at a disadvantage as they look to compete against their growing competitors.
The result of this growth is that the distribution segment is gaining more clout, and more power. Not only are these firms getting larger from a premium perspective than that of their carriers, but they have superior negotiation power against their relatively less large carrier partners.
Independent and smaller firms risk being left behind
The rate at which firms are growing is significant, and independent firms, even if they grow at that same rate, are still, from a dollars perspective, potentially getting left behind. A firm that is doing well, with growth of about 10-20%, could still find itself in a less competitive place because of the rate appreciation and premium flow that has, on an unprecedented level, benefited many of the distributors over the last five years.
Overall, smaller, independent firms should be aware of the continued trend of large specialty firms gaining greater market clout. Smaller firms that don’t take proactive measures risk becoming less relevant and having less negotiating power than their larger peers.
