Mercury Insurance 2008 Annual Report Download - page 40

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Regulatory and Legal Matters
The process for implementing rate changes varies by state, with California, Georgia, New York, New Jersey,
Pennsylvania and Nevada requiring prior approval from the DOI before a rate may be implemented. Illinois, Texas, Virginia,
Arizona and Michigan only require that rates be filed with the DOI, while 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. During 2008, the Company implemented automobile and homeowners insurance rate decreases in California that
were initially filed in August 2006 and approved by the California DOI in January 2008 as part of the Company’s compliance
with regulations proposed by the California DOI and approved in July 2006, as more fully described below. In five other states,
the Company implemented automobile rate increases.
The California DOI uses rating factor regulations requiring automobile insurance rates to be determined in decreasing
order of importance by (1) driving safety record, (2) miles driven per year, (3) years of driving experience and (4) other factors as
determined by the California DOI to have a substantial relationship to the risk of loss and adopted by regulation.
In April 2007, regulations became effective that generally tighten the existing Proposition 103 prior approval ratemaking
regime primarily by establishing a maximum allowable rate of return (calculated by adding 6 percent plus the average of short,
intermediate, and long-term T-bill rates) and a minimum allowable rate of return of negative 6 percent of surplus. However, the
practical impact of these limitations is unclear because the new regulations allow for the California DOI to grant a number of
variances based on loss prevention, business mix, service to underserved communities, and other factors. In October 2007, the
California DOI invited comments from consumer groups and the insurance industry in an effort to set appropriate standards for
granting or denying specific variances and to provide sufficient instruction regarding what information or data to submit when an
insurer is applying for a specific variance. The comment period ended on November 16, 2007. The California DOI then published
proposed amendments to its regulations and held an informal workshop on them on April 7, 2008. On April 29, 2008, the
Commissioner issued a new notice reflecting slight modifications to the proposed regulations and superseding the prior
version. The proposed changes were approved as emergency regulations by the Office of Administrative Law (“OAL”) on May
16, 2008 and became effective as of that date.
On July 14, 2006, the California OAL approved proposed regulations by the California DOI that effectively reduce the
weight that insurers can place on a person’s residence when establishing automobile insurance rates. Insurance companies in
California are required to file rating plans with the California DOI that comply with the new regulations. There is a two year
phase-in period for insurers to fully implement those plans. The Company made a rate filing in August 2006 that reduced the
territorial impact of its rates and requested a small overall rate increase. The California DOI approved the August 2006 filing in
January 2008, which resulted in a small rate increase for two of the California insurance subsidiaries and a small decrease for a
third, for a total net rate reduction of approximately 2.5%. The newly approved rates went into effect in April 2008. In July 2008,
the Company made an additional rate filing to bring its rates into full compliance with the new regulations. However, the
Company cannot predict whether the California DOI will determine that the Company’s rates are in full compliance with the new
regulations as a result of this filing. In general, the Company expects that the regulations will cause rates for urban drivers to
decrease and those for non-urban drivers to increase. These rate changes are likely to increase consumer shopping for insurance
which could affect the volume and the retention rates of the Company’s business. It is the Company’s intention to maintain its
competitive position in the marketplace while complying with the new regulations.
In March 2006, the California DOI issued an Amended Notice of Non-Compliance (“NNC”) to the NNC originally
issued in February 2004 alleging that the Company charged rates in violation of the California Insurance Code, willfully permitted
its agents to charge broker fees in violation of California law, and willfully misrepresented the actual price insurance consumers
could expect to pay for insurance by the amount of a fee charged by the consumer’s insurance broker. Through this action, the
California DOI seeks to impose a fine for each policy in which the Company allegedly permitted an agent to charge a broker fee,
which the California DOI contends is the use of an unapproved rate, rating plan or rating system. Further, the California DOI
seeks to impose a penalty for each and every date on which the Company allegedly used a misleading advertisement alleged in the
NNC. Finally, based upon the conduct alleged, the California DOI also contends that the Company acted fraudulently in violation
of Section 704(a) of the California Insurance Code, which permits the California Commissioner of Insurance to suspend
certificates of authority for a period of one year. The Company filed a Notice of Defense in response to the NNC. The Company
does not believe that it has done anything to warrant a monetary penalty from the California DOI. The San Francisco Superior
Court, in Robert Krumme, On Behalf Of The General Public v. Mercury Insurance Company, Mercury Casualty Company, and
California Automobile Insurance Company, denied plaintiff’s requests for restitution or any other form of retrospective monetary
relief based on the same facts and legal theory. The matter is currently in discovery and a hearing before the administrative law
judge is scheduled to start on March 16, 2009. This matter has been the subject of five continuations since the original NNC was
issued in 2004.
The Company is not able to determine the impact of any of the legal and regulatory matters described above. It is
possible that the impact of some of the changes could adversely affect the Company and its operating results, however, the
ultimate outcome is not expected to be material to the Company’s financial position.