Mercury Insurance 2012 Annual Report Download - page 43

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companies would likely be required by state law to absorb the losses of the failed insurer and would be faced with an unexpected
surge in new business from the failed insurer’s former policyholders.
The Company may be adversely affected by changes in the private passenger automobile insurance industry.
80.6% of the Company’s direct written premiums for the year ended December 31, 2012 were generated from private
passenger automobile insurance policies. Adverse developments in the market for personal automobile insurance or the personal
automobile insurance industry in general, whether related to changes in competition, pricing or regulations, could cause the
Company’s results of operations to suffer. The property-casualty insurance industry is also exposed to the risks of severe weather
conditions, such as rainstorms, snowstorms, hail and ice storms, hurricanes, tornadoes, wild fires, sinkholes, earthquakes and, to
a lesser degree, explosions, terrorist attacks, and riots. The automobile insurance business is also affected by cost trends that impact
profitability. Factors which negatively affect cost trends include inflation in automobile repair costs, automobile parts costs, used
car prices, and medical care.
The Company cannot predict the impact that changing climate conditions, including legal, regulatory and social
responses thereto, may have on its business.
Various scientists, environmentalists, international organizations, regulators and other commentators believe that global
climate change has added, and will continue to add, to the unpredictability, frequency and severity of natural disasters (including,
but not limited to, hurricanes, tornadoes, freezes, other storms and fires) in certain parts of the world. In response, a number of
legal and regulatory measures and social initiatives have been introduced in an effort to reduce greenhouse gas and other carbon
emissions that may be chief contributors to global climate change. The Company cannot predict the impact that changing climate
conditions, if any, will have on its business or its customers. It is also possible that the legal, regulatory and social responses to
climate change could have a negative effect on the Company’s results of operations or financial condition.
The insurance industry is subject to extensive regulation, which may affect the Company’s ability to execute its business
plan and grow its business.
The Company is subject to comprehensive regulation and supervision by government agencies in each of the states in which
its insurance subsidiaries are domiciled, sell insurance products, issue policies, or handle claims. Some states impose restrictions
or require prior regulatory approval of specific corporate actions, which may adversely affect the Company’s ability to operate,
innovate, obtain necessary rate adjustments in a timely manner or grow its business profitably. These regulations provide safeguards
for policyholders and are not intended to protect the interests of shareholders. The Company’s ability to comply with these laws
and regulations, and to obtain necessary regulatory action in a timely manner is, and will continue to be, critical to its success.
Some of these regulations include:
Required Licensing. The Company operates under licenses issued by the DOI in the states in which the Company sells
insurance. If a regulatory authority denies or delays granting a new license, the Company’s ability to enter that market quickly or
offer new insurance products in that market may be substantially impaired. In addition, if the DOI in any state in which the Company
currently operates suspends, non-renews, or revokes an existing license, the Company would not be able to offer affected products
in the state.
Transactions Between Insurance Companies and Their Affiliates. Transactions between the Insurance Companies and their
affiliates (including the Company) generally must be disclosed to state regulators, and prior approval of the applicable regulator
is required before any material or extraordinary transaction may be consummated. State regulators may refuse to approve or delay
approval of some transactions, which may adversely affect the Company’s ability to innovate or operate efficiently.
Regulation of Insurance Rates and Approval of Policy Forms. The insurance laws of most states in which the Company
conducts business require insurance companies to file insurance rate schedules and insurance policy forms for review and approval.
If, as permitted in some states, the Company begins using new rates before they are approved, it may be required to issue refunds
or credits to the Company’s policyholders if the new rates are ultimately deemed excessive or unfair and disapproved by the
applicable state regulator. In other states, prior approval of rate changes is required and there may be long delays in the approval
process or the rates may not be approved. Accordingly, the Company’s ability to respond to market developments or increased
costs in that state can be adversely affected.
Restrictions on Cancellation, Non-Renewal or Withdrawal. Most of the states in which the Company operates have laws
and regulations that limit its ability to exit a market. For example, these states may limit a private passenger auto insurer’s ability
to cancel and non-renew policies or they may prohibit the Company from withdrawing one or more lines of insurance business
from the state unless prior approval is received from the state insurance department. In some states, these regulations extend to
significant reductions in the amount of insurance written, not just to a complete withdrawal. Laws and regulations that limit the