Mercury Insurance 2015 Annual Report Download - page 22

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10
of the Company’s competitors are larger and well-capitalized national companies that have broad distribution networks of employed
or captive agents.
Reputation for customer service and price are the principal means by which the Company competes with other insurers. In
addition, the marketing efforts of independent agents can provide a competitive advantage. Based on the most recent regularly
published statistical compilations of premiums written in 2015, the Company was the fourth largest writer of private passenger
automobile insurance in California and the fifteenth largest in the United States.
The property and casualty insurance industry is highly cyclical, with alternating hard and soft market conditions. The
Company has historically seen premium growth during hard market conditions. The Company believes that the market is hardening
with carriers generally raising rates, although this also depends on individual state profitability and the carriers’ growth appetite.
Reinsurance
The Company is party to a Catastrophe Reinsurance Treaty ("Treaty") that is effective through June 30, 2016. The Treaty
provides for $100 million coverage on a per occurrence basis after covered catastrophe losses exceed a $100 million Company
retention limit, excludes coverage in Florida, and limits certain coverages to 37% of catastrophe losses resulting from earthquakes
and fire following earthquakes. The annual premium is $4.1 million.
The Company has reinsurance for PIP claims in Michigan through the Michigan Catastrophic Claims Association, a private
non-profit unincorporated association created by the Michigan Legislature. The reinsurance covers losses in excess of $545,000
per person and has no maximum limit. Michigan law provides for unlimited lifetime coverage for medical costs caused by
automobile accidents.
For California homeowners policies, the Company has reduced its catastrophe exposure from earthquakes by placing
earthquake risks directly with the California Earthquake Authority ("CEA"). However, the Company continues to have catastrophe
exposure to fires following an earthquake. For more detailed discussion, see "Regulation—Insurance Assessments" below.
The Company carries a commercial umbrella reinsurance treaty and seeks facultative arrangements for large property risks.
In addition, the Company has other reinsurance in force that is not material to the consolidated financial statements. If any reinsurers
are unable to perform their obligations under a reinsurance treaty, the Company will be required, as primary insurer, to discharge
all obligations to its policyholders in their entirety.
Regulation
The Insurance Companies are subject to significant regulation and supervision by insurance departments of the jurisdictions
in which they are domiciled or licensed to operate business.
Department of Insurance Oversight
The powers of the DOI in each state primarily include the prior approval of insurance rates and rating factors and the
establishment of capital and surplus requirements, solvency standards, restrictions on dividend payments and transactions with
affiliates. DOI regulations and supervision are designed principally to benefit policyholders rather than shareholders.
California Proposition 103 requires that property and casualty insurance rates be approved by the California DOI prior to
their use and that no rate be approved which is excessive, inadequate, unfairly discriminatory, or otherwise in violation of the
provisions of the initiative. Theproposition specifies four statutory factors required to be appliedin "decreasing order of importance"
in determining rates for private passenger automobile insurance: (1) the insured’s driving safety record, (2) the number of miles
the insured drives annually, (3) the number of years of driving experience of the insured and (4) whatever optional factors are
determined by the California DOI to have a substantial relationship to risk of loss and are adopted by regulation. The statute further
provides that insurers are required to give at least a 20% discount to "good drivers," as defined, from rates that would otherwise
be charged to such drivers and that no insurer may refuse to insure a "good driver." The Company’s rate plan operates under these
rating factor regulations.
Insurance rates in California, Georgia, New York, New Jersey, Pennsylvania, and Nevada require prior approval from the
state DOI, while insurance rates in Illinois, Texas, Virginia, Arizona, and Michigan must only be filed with the respective DOI
before they are implemented. Oklahoma and Florida have a modified version of prior approval laws. In all states, the insurance
code provides that rates must not be excessive, inadequate, or unfairly discriminatory.