Mercury Insurance 2009 Annual Report Download - page 55

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, which are subject to
interpretation, were approved as emergency regulations by the Office of Administrative Law (“OAL”) on
May 16, 2008 and became effective as of that date. The Company continues to assess the effect of this regulation
on its rate filings.
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 was 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 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
2006 regulations. The filing has not been approved at this time. 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 2006
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. While a hearing before the administrative law judge had been set to
start on September 14, 2009, the hearing has been vacated and continued to a future date to be determined. 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 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.
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