Mercury Insurance 2009 Annual Report Download - page 33

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The Company’s success depends on its ability to accurately underwrite risks and to charge adequate
premiums to policyholders.
The Company’s financial condition, liquidity, and results of operations 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;
• unexpected medical inflation; and
• unanticipated inflation in auto repair costs, auto 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Such risks may result in the Company’s pricing being based on outdated, inadequate or inaccurate data or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 results of operations, financial condition, and cash flow
could be materially adversely affected.
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 coverage beyond its underwriting intent or by increasing the number or size of
claims. In some instances, these changes may not become apparent until sometime after the Company has issued
insurance policies that are affected by the changes. As a result, the full extent of liability under the Company’s
insurance policies may not be known for many years after a policy is issued.
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