Mercury Insurance 2011 Annual Report Download - page 30

Competitive Conditions
The Company operates in the highly competitive property and casualty industry subject to competition on
pricing, claims handling, consumer recognition, coverage offered and other product features, customer service,
and geographic coverage. Some of the Company’s competitors are larger and well-capitalized national
companies which have broad distribution networks of employed or captive agents.
Reputation for customer service and price are the principal means by which the Company competes with
other automobile insurers. In addition, the marketing efforts of independent agents can provide a competitive
advantage. Based on the most recent regularly published statistical compilations of premiums written in 2011, the
Company was the fifth largest writer of private passenger automobile insurance in California and the twelfth
largest in the United States.
The property and casualty insurance industry is highly cyclical, with alternating hard and soft market
conditions. The Company has historically seen significant premium growth during hard markets. Premium
growth rates in soft markets have ranged from slightly positive to negative and were consistent in 2011.
Reinsurance
The Company has reinsurance through the Florida Hurricane Catastrophe Trust Fund (“FHCF”) that
provides coverage equal to approximately 90 percent of $25 million in excess of $10 million per occurrence
based on the latest information provided by FHCF. The coverage is expected to change when new information is
available in March 2012.
For California homeowners policies, the Company has reduced its catastrophe exposure from earthquakes
by placing earthquake risks with the California Earthquake Authority (“CEA”). However, the Company
continues to have catastrophe exposure to fires following an earthquake. For more detailed discussion, see
“Regulation—Insurance Assessments.”
The Company carries a commercial umbrella reinsurance treaty and seeks facultative arrangements for large
property risks. In addition, the Company has other reinsurance in force that is not material to the consolidated
financial statements. If any reinsurers are unable to perform their obligations under a reinsurance treaty, the
Company will be required, as primary insurer, to discharge all obligations to its insured in their entirety.
Regulation
The Insurance Companies are subject to significant regulation and supervision by insurance departments of
the jurisdictions in which they are domiciled or licensed to operate business.
Department of Insurance Oversight
The powers of the DOI in each state primarily include the prior approval of insurance rates and rating
factors and the establishment of capital and surplus requirements, solvency standards, restrictions on dividend
payments and transactions with affiliates. DOI regulations and supervision are designed principally to benefit
policyholders rather than shareholders.
California Proposition 103 requires that property and casualty insurance rates be approved by the California
DOI prior to their use and that no rate be approved which is excessive, inadequate, unfairly discriminatory, or
otherwise in violation of the provisions of the initiative. The proposition specifies four statutory factors required
to be applied in “decreasing order of importance” in determining rates for private passenger automobile
insurance: (1) the insured’s driving safety record, (2) the number of miles the insured drives annually, (3) the
number of years of driving experience of the insured and (4) whatever optional factors are determined by the
California DOI to have a substantial relationship to risk of loss and are adopted by regulation. The statute further
10