Every once in a while, I believe revisiting fundamental industry principles is beneficial. One such essential principle is diversity, especially for insurance carriers. “Diversity” in this case has nothing to do with race, religion, or political affiliation. Insurance diversity is about spreading risk. In other words, if a carrier wants to insure 100 homes, those 100 homes should be in different ZIP codes.
Why Diversify?
Geographic diversity is mandatory for reducing risk. But quite a few carriers today have too much business in one location. Before anyone objects and believes that carriers know better, their AI addresses this, or whatever wishful thinking is being applied, look at the carriers who lost all those homes in California.
Another example is what happened in the Midwest. Regional carriers were reinsuring property in the same ZIP codes as their own property, and they likely had too much of their own TIV (total insurable value) in those ZIP codes. When the derechos came through, their property reinsurance loss ratios topped out at 999.99%. Carriers that don’t specialize in reinsurance should not do reinsurance, but that is another weakness for another day.
Property diversification is simple to map. Liability diversification is easy to map. No good reason exists for concentrations of risk. Another benefit is the ability to write more accounts safely, rather than employing the current methodology for wildfires, which is not writing anything whatsoever in a potential wildfire zone. As a result, a lot of good risks are not being written and a lot of high-profit business is being missed.
Distributor Diversification
Diversity includes spreading the concentration of distributors. Historically, carriers were the dog and distributors were the tail. Carriers’ expense management was built on this concept. Carriers would have little business, on a percentage basis, with any one distributor. This helped control expenses and improved the spread of underwriting risk.
Doing business with thousands of distributors spread widely, because distributors tend to write geographically centered business, created a natural spread of business. Also, distributors were not big enough to sway underwriting standards in ways that would deteriorate a carrier’s loss ratios, and they were, mostly, not big enough to demand extra compensation.
This is not the case today.
Selective Insurance publishes its concentration in its annual 10-K. I imagine some other stock carriers do the same, but I think Selective is well managed, reasonably representative of other carriers’ experiences in this space, and what it publishes is easy to understand. In its 2025 10-K (2024 results), Selective noted that approximately 46% of its premiums are generated by aggregators–an increase from 35% three years ago. Selective may be doing a better job than key competitors, but 46% is high relative to history.
There are carriers where 50%-plus of their premiums are generated by five or fewer distributors.
Depending on the distributor, additional geographic exposure might not exist because their consolidation/network strategy has considerable geographic and other risk diversification. However, that is not always the case, especially as some larger distributors push small commercial accounts into service centers where retention rates are lower. And where retention rates are lower, adverse selection may build.
The same thing happens when carriers are short on surplus and begin nonrenewing or telling agents to get off great accounts. That carrier simply needs to “right-size” its premium-to-surplus ratio, even if it means eliminating good accounts. This is not an issue for good accounts that can easily find better carriers (and better is the reality because the account wouldn’t be moving if the incumbent wasn’t short in surplus). The clients that can’t move concentrate with the carrier–i.e., reduced diversification.
But even if loss exposure is not compromised, underwriting and expense issues arise. The tail is wagging the dog. The carrier cannot risk losing such a large book, and if the large book does not consist of adverse selection, it can be moved. These large distributors have their own markets, after all.
Expense Factor
The expense factor is possibly more problematic. AM Best ran a study in 2024 showing commissions have increased. Ask any regular agency if commissions have increased, and the answer is likely “NO!” Arthur Gallagher’s 10-K shows the company now earns more ($359 million versus $268 million) in additional overrides (if I’m interpreting that line item correctly) than regular contingencies. I assume the label the company uses includes the overrides.
Carriers do not give up extra commissions voluntarily.
Having that much concentration with such few distributors–distributors who have competing markets and are now larger than the majority of carriers–is bad management. Carriers always had the power to mitigate this risk, but they did not act.
If carriers want to realign in this regard, the solution is simple, given the debt loads of the consolidators. Cut their commission rates so that they must sell assets, meaning agencies. It is drastic, as remedying any concentration of risk is, because the remedy needs to happen now–not over 10 years. To do it over 10 years is oxymoronic. This may sound harsh, but gentle is not part of the solution because carriers waiting 10 years to solve the problem likely won’t exist in 10 years, at least not without their stock tanking.
I know these are not “high-falutin” AI, let’s all get excited about the easy button solutions. These are basic, fundamental facts of how to run an insurance company. Failure is due to humans, and the solution is dependent on humans making the proper analysis, making hard decisions, and building a healthier insurance environment. To remain healthy, the insurance industry cannot become concentrated.
Already, 10 property and casualty carriers write 52% of all premiums (out of approximately 1,000 carriers). Ninety carriers write 90% of all premiums. The remaining 910 carriers are splitting 10% of premiums. Maybe this itself is another example of excessive concentration?
Spreading risk is fundamental to insurance management. It’s time for carriers to re-evaluate all forms of their spread of risk.
Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. E-mail: chris@burand-associates.com.
Topics
Carriers
