The article investigates whether the market concentration is associated with an insurer's financial stability in the U.S. property–liability insurance industry over the period 1992–2010. We employ two‐stage least squares techniques with instrumental variables to address likely endogeneity problems. The results show that higher market concentration is associated with lower financial stability of insurance firms, consistent with the “concentration‐fragility” view. Our results indicate that firm‐specific characteristics including firm size, underwriting leverage, organizational form, product and geographical diversification, along with the exposure to natural catastrophes and macroeconomic conditions are important determinants in ensuring a safe and sound insurance system. Robustness tests using various estimation methods and alternative measures of financial stability present consistent results.