A catastrophe-laden 2011 and a tornado-filled start to 2012could have a debilitating impact on smaller carriers, based on thesimple premise that they often have a lot smaller of a financialcushion—less business from which to draw and pay claims, analystssay.

When disaster strikes, smaller carriers “can feel the painmore,” says Cliff Gallant, an analyst with Keefe, Bruyette &Woods.

Failures can and do happen. Following the destructive tornadoseason in 2011 that included widespread devastation in Joplin, Mo.,three Barton County Mutual Group companies could not keep up withclaims. Regulators got a judge to approve a plan to allow thecompanies' operations to be merged into the Missouri Farm Bureau.

And because many small and regional insurers follow the mutualbusiness model, they can only grow from within, without access tocapital markets.

Mutual companies are “not built to grow,” says Gallant, whonotes that larger insurers also have the advertising budgets tomore aggressively attract consumers.

“Over time, I think the industry's big guys will get bigger,”Gallant says. “There will be a lot fewer small companies.”

And consolidation is becoming more commonplace already,according to Rich Attanasio, vice president of personal lines atinsurance-ratings agency A.M. Best Co. Attanasio has seen largercarriers absorbing smaller peers in certain states, in order totake advantage of the smaller companies' distribution andlicensing.

For example, A.M. Best withdrew its ratings of WisconsinAmerican Mutual Insurance Co. last October after its merger withWestern National Mutual Insurance Co.

Nebraska's Battle Creek Mutual Insurance Co. recently affiliateditself, and entered into a quota share reinsurance agreement, withNodak Mutual Insurance Co. of North Dakota.  

For those smaller carriers that intend to stick it out for thelong term, their survivability depends on their ability to “stickto their knitting,” says Attanasio. In other words: Sound riskmanagement and sticking to the values that got these companies towhere they are now will propel them through bad loss years.