Mercury Insurance 2012 Annual Report Download - page 36

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15
• extra-contractual liability arising from bad faith claims;
• weather catastrophes, including those which may be related to climate change;
• losses from sinkhole claims;
• 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Such risks may result in the Company’s pricing being based on outdated, inadequate or inaccurate data, or inappropriate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 financial
condition, results of operations, and liquidity 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.
The Company’s insurance rates are subject to prior approval by the departments of insurance in most of the states in
which the Company operates, and to political influences.
In most of the states in which it operates, the Company must obtain the DOI's prior approval of insurance rates charged to
its customers, including any increases in those rates. If the Company is unable to receive approval of the rate changes it requests,
or if such approval is delayed, the Company’s ability to operate its business in a profitable manner may be limited and its financial
condition, results of operations, and liquidity may be adversely affected. Additionally, in California, the law allows for consumer
groups to intervene in rate filings which frequently causes delays in the timeliness of rate approvals and can impact the level of
rate that is ultimately approved.
From time to time, the auto insurance industry comes under pressure from state regulators, legislators, and special interest
groups to reduce, freeze, or set rates at levels that do not correspond with underlying costs, in the opinion of the Company’s
management. The homeowners insurance business faces similar pressure, particularly as regulators in catastrophe-prone states
seek an acceptable methodology to price for catastrophe exposure. In addition, various insurance underwriting and pricing criteria
regularly come under attack by regulators, legislators, and special interest groups. The result could be legislation, regulations, or
new interpretations of existing regulations that would adversely affect the Company’s business, financial condition, and results
of operations.
Loss of, or significant restriction on, the use of credit scoring in the pricing and underwriting of personal lines products
could reduce the Company’s future profitability.
The Company uses credit scoring as a factor in pricing and underwriting decisions where allowed by state law. Some
consumer groups and regulators have questioned whether the use of credit scoring unfairly discriminates against some groups of
people and are calling to prohibit or restrict the use of credit scoring in underwriting and pricing. Laws or regulations that
significantly curtail or regulate the use of credit scoring, if enacted in a large number of states in which the Company operates,
could impact the Company’s future results of operations.
If the Company cannot maintain its A.M. Best ratings, it may not be able to maintain premium volume in its insurance
operations sufficient to attain the Company’s financial performance goals.
The Company’s ability to retain its existing business or to attract new business in its insurance operations is affected by its
rating by A.M. Best Company. A.M. Best Company currently rates all of the Company’s insurance subsidiaries with sufficient
operating history to be rated as either A+ (Superior) or A- (Excellent). If the Company is unable to maintain its A.M. Best ratings,
the Company may not be able to grow its premium volume sufficiently to attain its financial performance goals, and if A.M. Best
were to downgrade the Company’s ratings, the result may adversely affect the Company’s business, financial condition, and results
of operations.