Mercury Insurance 2015 Annual Report Download - page 27

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15
The Company’s financial condition, results of operations, and liquidity depend on its ability to underwrite and set premiums
accurately for the risks it assumes. Premium rate adequacy is necessary to generate sufficient premium to offset losses, loss
adjustment expenses, and underwriting expenses and to earn a profit. In order to price its products accurately, the Company must
collect and properly analyze a substantial volume of data; develop, test, and apply appropriate rating formulae; closely monitor
and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy. The Company’s
ability to undertake these efforts successfully, and as a result, price accurately, is subject to a number of risks and uncertainties,
including but not limited to:
• availability of sufficient reliable data;
• incorrect or incomplete analysis of available data;
• uncertainties inherent in estimates and assumptions, generally;
• selection and application of appropriate rating formulae or other pricing methodologies;
• successful innovation of new pricing strategies;
• recognition of changes in trends and in the projected severity and frequency of losses;
• the Company’s ability to forecast renewals of existing policies accurately;
• unanticipated court decisions, legislation or regulatory action;
• ongoing changes in the Company’s claim settlement practices;
• changes in operating expenses;
• changing driving patterns;
• extra-contractual liability arising from bad faith claims;
• weather catastrophes, including those which may be related to climate change;
• unexpected medical inflation; and
• unanticipated inflation in automobile repair costs, automobile parts prices, and used car prices.
Such risks may result in the Company’s pricing being based on outdated, inadequate or inaccurate data, or inappropriate
analyses, assumptions or methodologies, and may cause the Company to estimate incorrectly future changes in the frequency or
severity of claims. As a result, the Company could underprice risks, which would negatively affect the Company’s margins, or it
could overprice risks, which could reduce the Company’s volume and competitiveness. In either event, the Company’s financial
condition, results of operations, and liquidity could be materially and adversely affected.
The Company’s insurance rates are subject to approval by the departments of insurance in most of the states in which
the Company operates, and to political influences.
In six of the states in which it operates, including California, the Company must obtain the DOI’s prior approval of insurance
rates charged to its customers, including any increases in those rates. If the Company is unable to receive approval of the rate
changes it requests, or if such approval is delayed, the Company’s ability to operate its business in a profitable manner may be
limited and its financial condition, results of operations, and liquidity may be adversely affected. Additionally, in California, the
law allows for consumer groups to intervene in rate filings, which frequently causes delays in the timeliness of rate approvals and
implementation of rate changes and can impact the rate that is ultimately approved.
From time to time, the automobile insurance industry comes under pressure from state regulators, legislators, and special
interest groups to reduce, freeze, or set rates at levels that do not correspond with underlying costs, in the opinion of the Company’s
management. The homeowners insurance business faces similar pressure, particularly as regulators in catastrophe-prone states
seek an acceptable methodology to price for catastrophe exposure. In addition, various insurance underwriting and pricing criteria
regularly come under attack by regulators, legislators, and special interest groups. The result could be legislation, regulations, or
new interpretations of existing regulations that adversely affect the Company’s business, financial condition, and results of
operations.
The effects of emerging claim and coverage issues on the Company’s business are uncertain and may have an adverse
effect on the Company’s business.
As industry practices and legal, judicial, social, and other environmental conditions change, unexpected and unintended
issues related to claims and coverage may emerge. These issues may adversely affect the Company’s business by either extending