Mercury Insurance 2009 Annual Report Download - page 28

Insurance rates in 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.
The DOI in each state in which the Company operates is responsible for conducting periodic financial and
market conduct examinations of insurance companies domiciled in their states. Market conduct examinations
typically review compliance with insurance statutes and regulations with respect to rating, underwriting, claims
handling, billing, and other practices. The following table provides a summary of current financial and market
conduct examinations:
State Exam Type Period Under Review Status
VA Market Conduct Jul 2008 to Jul 2009 Fieldwork began in January 2010
NJ Market Conduct Sep 2007 to Aug 2008 Report was issued in January 2010
CA Rating & Underwriting Mar 2007 to May 2007 Preliminary draft was issued in December 2009
FL Market Conduct Sep 2005 to Dec 2006 Report was issued in June 2009
OK Financial 2005 to 2007 Report was issued in May 2009
During the course of these examinations, the DOI generally reports findings to the Company, however, none
of the findings reported to date is expected to be material to the Company’s financial position.
For discussion of current regulatory matters in California, see “Regulatory and Legal Matters” in
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The operations of the Company are dependent on the laws of the states in which it does business and
changes in those laws can materially affect the revenue and expenses of the Company. The Company retains its
own legislative advocates in California. The Company made financial contributions of $148,200 and $354,450 to
officeholders and candidates in 2009 and 2008, respectively. The Company believes in supporting the political
process and intends to continue to make such contributions in amounts which it determines to be appropriate.
The Company is supporting the Continuous Coverage Auto Insurance Discount Act (“CCAIDA”), a
California ballot initiative which will be on the June 2010 ballot. If passed, the CCAIDA will provide for a
portable persistency discount, allowing insurance companies to offer new customers discounts based on having
continuous insurance coverage from any insurance company. Currently, the California DOI allows insurance
companies to provide persistency discounts based on continuous coverage only with existing customers. While
the Company strongly believes this will be beneficial for the insurance consumer, there are consumer activist
groups both supporting and opposing the initiative. The Company made financial contributions of $3.5 million in
2009 related to this initiative.
Risk-Based Capital
The Insurance Companies must comply with minimum capital requirements under applicable state laws and
regulations, and must have adequate reserves for claims. The minimum statutory capital requirements differ by
state and are generally based on balances established by statute, a percentage of annualized premiums, a
percentage of annualized loss, or risk-based capital (“RBC”) requirements. The RBC requirements are based on
guidelines established by the NAIC. The RBC formula was designed to capture the widely varying elements of
risks undertaken by writers of different lines of insurance having differing risk characteristics, as well as writers
of similar lines where differences in risk may be related to corporate structure, investment policies, reinsurance
arrangements, and a number of other factors. At December 31, 2009, each of the Insurance Companies had
sufficient capital to exceed the highest level of minimum required capital.
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