The Wholesale Insurance Evolution: From Consolidation to Innovation

In a decade defined by disruption, the wholesale insurance market has adapted and evolved to meet the demands of an increasingly complex risk environment. The industry has been remarkable in its ability to pivot, innovate and consolidate in ways that have reshaped its very foundation in recent years.

Between 2010 and 2020, the wholesale insurance market underwent significant changes, reshaping broader industry dynamics and altering business operations. Before 2010, retail insurance agencies predominantly avoided leveraging wholesalers, opting instead to go direct, losing out on access to excess and surplus lines (E&S) markets. However, as loss ratios increased, this strategy proved unsustainable. In response, retail agencies began to leverage wholesalers, particularly for access to E&S markets most accommodating to evolving and emerging risks.

As a result of this shift, major wholesalers began advocating for retailers to consolidate their business to a select few wholesale partners — a revolutionary strategy that transformed the industry and ran for the next decade. At the same time, private equity (PE) firms started acquiring and consolidating retail agencies to streamline operations and enhance profitability, effectively compelling the retail agencies they purchased to centralize their wholesaler relationships.

Small and mid-size business risks have become more complex and increased in size, resulting in the need for specialized insurance policies that standard carriers won’t cover. The E&S market — which has always been more responsive to complex risks — has expanded rapidly, growing much faster than the admitted market. According to S&P Global, the E&S market saw double-digit, year-over-year growth for four consecutive years, from 2018 to 2022. In the early 2010s, when retail insurance agencies were avoiding leveraging wholesalers, there were only about four to five wholesale-only insurance companies in the United States. Now that number has surged to 50-plus.

Facing Major Evolving Risk Challenges

In recent years, the wholesale business insurance market has navigated numerous challenges with creative product and capacity solutions for risks including a global pandemic, social inflation, supply chain disruptions and the escalating impacts of climate change. These events and associated risks have underscored the importance of specialized coverage.

Some highlights of specialized coverage include event cancellation coverage playing a sizable role during the pandemic and supply chain disruptions highlighting the value of business interruption coverage. Climate change, reflected in the increasing frequency and severity of natural disasters like hurricanes and wildfires, has reinforced the critical role of property catastrophe insurance. As technology develops and cyber risks become more complex, specialty coverages have become more essential for business. In addition, social inflation has put new pressures on casualty insurance, making it increasingly costly over time.

From an overall market perspective, this all speaks well to the health of the industry and its ability to adapt and refine products in response to trends. The growing need for flexible insurance solutions has shifted the focus from the admitted market to the E&S market, generally considered the nucleus of the wholesale insurance industry.

In many cases, these challenges help to drive the industry’s evolution, broadening the classes of businesses served, filling coverage gaps, expanding geographic reach and deepening specializations.

Massive Consolidations

Today, the wholesale insurance market is undergoing significant market consolidation, mainly driven by mergers and acquisitions (M&A). According to Marsh Berry, transaction activity of delegated authority enterprises and wholesale brokers hit an all-time high in 2023 (181 transactions) with M&A activity essentially remaining flat since an earlier spike in 2021.

This trend has created three distinct categories of wholesalers: smaller firms struggling to compete, medium-sized firms thriving due to niche expertise, and colossal entities dominating the market. Given current market dynamics, only the medium-sized and colossal wholesalers are set up to survive long-term.

Within the wholesale insurance market, the brokerage business is now approximately 95% consolidated. Over the past two decades, the largest wholesalers have acquired most independent wholesale businesses. Binding Authority/Coverholder business is about 50% consolidated — driven by big retail agency roll-ups opening up wholesale and program wings and buying out smaller competitors.

While consolidation has created opportunities for large players to access more customers, products and carriers, it has also introduced significant conflicts of interest. When retail agencies own wholesalers, it can lead to situations where retail producers feel pressured to only use affiliated wholesalers. This translates into fewer choices for retailers and legitimate concern over conflicts of working with a competitor’s subsidiary, as well as insurance companies being concerned about adverse risk selection.

Consolidation also strips away the personalized approach to servicing brokers and their unique risks — arguably the very thing that made those entities so valuable to begin with. This has led to some dissatisfaction among wholesale producers at consolidated firms, who often feel constrained by the lack of flexibility and the inability to grow because the market is crowded with their own companies’ other employees. It can also call into question whether clients are receiving the best the marketplace has to offer, or the service support being received.

What’s Next for Wholesale

Looking at the next five years, two key trends will shape the wholesale insurance industry’s future: the integration of advanced technologies, particularly AI, and the use of third-party data and sophisticated algorithms to enhance underwriting and portfolio management.

Even in 2024, insurance operations are primarily manual — new technologies, specifically Web Service APIs, bring opportunities for efficiency through connectivity. While traditionally cautious with technology adoption, the wholesale insurance industry now has an opportunity to streamline operations through better system connectivity, such as implementing APIs and web services.

Harnessing third-party data intersected with proprietary client data and analyzed by AI will also enhance risk assessment accuracy, streamline underwriting processes, and lead to more personalized, responsive insurance products that meet — and even anticipate — the evolving needs of clients. The industry is well-positioned to capitalize on these advancements, with expected growth in the program space, particularly with the rise of managing general underwriters (MGUs) and hybrid fronting companies.

A major risk facing the wholesale insurance market today is the increasing trend of retail agencies trying to own their own wholesalers. As top wholesalers grow and increasingly integrate with retail agencies, their independence — and thus their ability to offer the best solutions for clients — could be compromised.

Domination by the biggest wholesale firms is yet a different challenge. Will small retail agencies get their attention, will their producers remain satisfied with internal competition and will they provide the resources to provide best-in-class service are all questions in the market.

Also, as the industry continues to expand, there may be regulatory challenges in the E&S market down the line, particularly if the market softens.

The coming years will be defined by both opportunities and challenges, driven by ongoing consolidation and the integration of advanced technologies like AI. Preserving the independent structure of wholesalers will be vital to maintaining the specialization and personalized service that define the E&S market.

At this inflection point, the wholesale insurance industry has a proven business model and significant growth potential. By leveraging the unique strengths of the E&S marketplace and fostering innovation, the industry can continue to address emerging risks with tailored, entrepreneurial solutions and products.