Mercury Insurance 2010 Annual Report Download - page 36

Required Licensing. The Company operates under licenses issued by the DOI in the states in which the
Company sells insurance. If a regulatory authority denies or delays granting a new license, the Company’s ability
to enter that market quickly or offer new insurance products in that market may be substantially impaired. Also,
if the DOI in any state in which the Company currently operates suspends, non-renews, or revokes an existing
license, the Company would not be able to offer affected products in the state.
Transactions Between Insurance Companies and Their Affiliates. Transactions between the Insurance
Companies and their affiliates (including the Company) generally must be disclosed to state regulators, and prior
approval of the applicable regulator is required before any material or extraordinary transaction may be
consummated. State regulators may refuse to approve or delay approval of some transactions, which may
adversely affect the Company’s ability to innovate or operate efficiently.
Regulation of Insurance Rates and Approval of Policy Forms. The insurance laws of most states in which
the Company conducts business require insurance companies to file insurance rate schedules and insurance
policy forms for review and approval. If, as permitted in some states, the Company begins using new rates before
they are approved, it may be required to issue refunds or credits to the Company’s policyholders if the new rates
are ultimately deemed excessive or unfair and disapproved by the applicable state regulator. In other states, prior
approval of rate changes is required and there may be long delays in the approval process or the rates may not be
approved. Accordingly, the Company’s ability to respond to market developments or increased costs in that state
can be adversely affected.
Restrictions on Cancellation, Non-Renewal or Withdrawal. Most of the states in which the Company
operates have laws and regulations that limit its ability to exit a market. For example, these states may limit a
private passenger auto insurer’s ability to cancel and non-renew policies or they may prohibit the Company from
withdrawing one or more lines of insurance business from the state unless prior approval is received from the
state insurance department. In some states, these regulations extend to significant reductions in the amount of
insurance written, not just to a complete withdrawal. Laws and regulations that limit the Company’s ability to
cancel and non-renew policies in some states or locations and that subject withdrawal plans to prior approval
requirements may restrict the Company’s ability to exit unprofitable markets, which may harm its business and
results of operations.
Other Regulations. The Company must also comply with regulations involving, among other matters:
• the use of non-public consumer information and related privacy issues;
• the use of credit history in underwriting and rating;
• limitations on the ability to charge policy fees;
• limitations on types and amounts of investments;
• the payment of dividends;
• the acquisition or disposition of an insurance company or of any company controlling an insurance
company;
• involuntary assignments of high-risk policies, participation in reinsurance facilities and underwriting
associations, assessments and other governmental charges;
• reporting with respect to financial condition;
• periodic financial and market conduct examinations performed by state insurance department
examiners; and
• the other regulations discussed in this Annual Report on Form 10-K.
The failure to comply with these laws and regulations may also result in regulatory actions, fines and
penalties, and in extreme cases, revocation of the Company’s ability to do business in that jurisdiction. In
addition, the Company may face individual and class action lawsuits by insured and other parties for alleged
violations of certain of these laws or regulations.
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