Massive consolidation has taken place among the distributors of commercial insurance over the past ten years. Three global insurance brokers—Marsh McLennan, Aon, and Willis Corroon—now dominate most of the markets where brokers are active.

Insurance companies are taking the hit, for the clout of the global brokers has helped drive down insurance prices—a development that benefits corporate clients but squeezes insurers. Meanwhile, market deregulation in many markets, such as the European Union and Japan, has increased competition among insurers and thus exerted further downward pressure on prices.

Clearly, the balance of power between brokers and insurers is changing. But if they focus too closely on this competitive dynamic, both insurers and brokers may fail to address their fundamental weaknesses and therefore risk losing out to new entrants, such as investment bankers, Internet companies offering financial services, and specialist risk consultants. These competitors are in a position to exploit the inefficiencies of an insurance industry that is not sufficiently focused on the needs of its clients. Up to 35 percent of premiums are spent on transaction costs—equivalent, on a worldwide basis, to as much as $140 billion that is not invested in growth or returned to shareholders. By contrast, the...