The universe of insurance brokers keeps getting smaller as the brokers get bigger.

Aon Corp.'s 1996 takeover of Alexander & Alexander Services Inc. was only a warmup for the feeding frenzy that hit this year: Four of the world's 20 largest brokers in 1996 have been absorbed by larger competitors since January, and most of the rest have been transformed by mergers of their own.

Marsh & McLennan Cos. Inc. not only swallowed Johnson & Higgins and French broker CECAR but went on to gobble up former J&H correspondent brokers AB Max Matthiessen in Sweden, Bonnor & Co. A/S in Denmark and Brockman y Schuh in Mexico.

Aon, not to be outdone, this year followed its 1996 takeovers of A&A and Bain Hogg Group P.L.C. by acquiring Minet Group and former J&H German correspondent Jauch & Huebener KGaA.

Meanwhile, JIB Group P.L.C. merged with Lloyd Thompson Group P.L.C. to form Jardine Lloyd Thompson Group P.L.C.; Lowndes Lambert Group Holdings P.L.C. merged with Fenchurch P.L.C. to create Lambert Fenchurch Group P.L.C.; Forbes Group Ltd. announced a takeover of Nelson Hurst P.L.C.; and Gras Savoye S.A. of France sold one-third of itself to the as-yet-unacquired Willis Corroon P.L.C.

To top it off, publicly traded C.E. Heath P.L.C. was bought out by its management.

Brokers, in other words, have been busy, and not just with servicing clients.

The growing gap between the world's largest brokers and their smaller competitors prompted Business Insurance this year to rank only the world's top 10 brokerages, down from the 20 largest in previous years.

The consolidation frenzy mirrors similar trends in the insurance and reinsurance markets and has been driven by some of the same forces.

Brokerage clients, for example, have expanded into far-flung corners of the world while demanding increasingly sophisticated risk financing services. Brokers have had to keep up, providing local offices worldwide and expertise global clients require.

The longtime soft property/casualty insurance market also has put the squeeze on brokers' operating margins at the same time that the business has demanded huge investments in technology to handle fast-moving and complex transactions. Taken together, these factors favor mergers that cut operating expenses and spread the cost of capital investments.

"You build shareholder value by spreading cost across a broader revenue base," John Wicher, managing director with San Francisco-based Russell Miller Corporate Finance Inc., observed earlier this year.

Acquisitions also get brokers into worldwide insurance and reinsurance markets they may not have been able to tap previously. Size gives brokers clout with those markets, or at least allows them to keep pace with the power of international insurers and reinsurers that are themselves growing through mergers and acquisitions.

Finally, the merger frenzy has been fueled partly by the hot stock market, which has provided brokers the capital they need to complete deals.

Whether all the merging and acquiring turns out to be a good thing for buyers is debatable, though, and there have already been plenty of bumps in the consolidation road.

The increasing power of the new megabrokers has worried some risk managers -- those supposed to benefit from the brokers' marketing clout.

For example, J&H Marsh & McLennan Inc., Marsh & McLennan Cos. Inc.'s brokerage unit, stirred concerns this fall with an internal memo directing that all middle-market business placed with Chubb Corp. go through the broker's regional rather than local offices.

J&H Marsh & McLennan contends that the arrangement is more cost-effective for clients and insurers.

Some risk managers and competitors fretted, though, that the broker's move amounts to an attempt to control the market, increase brokerage commissions and -- if applied to larger accounts -- disrupt relationships between risk managers and local underwriters.

Broker mergers also can create internal turmoil, as account managers are forced out or jump ship. This in turn can disrupt brokers' longstanding relationships with clients.

Redmond, Wash.-based Microsoft Corp., a longtime J&H client, moved most of its retail brokerage business to Aon this year after the J&H-Marsh merger.

Every acquisition is different, and each can create unpleasant surprises.

When privately held J&H sold out to Marsh, for example, its director-shareholders probably didn't expect that they would be sued for fraud by a group of their retired counterparts. It happened last month, though, and the retirees are now charging that J&H's active directors intentionally cut the retirees out of the sale negotiations to ensure payouts of at least $36 million each for the active directors.

Whatever the potential pitfalls of these deals, though, brokers are probably not through with acquisitions.

Through mid-December, rumors continued to swirl that the two biggest wallflowers at the consolidation dance -- Sedgwick Group P.L.C. and Willis Corroon -- would merge with each other or be taken over by another competitor.

While both brokerages steadfastly deny the recurring rumors, 1998 is sure to produce more takeover stories.