Mercury Insurance 2012 Annual Report Download - page 52

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rating actions. The Company is unable to predict the duration and severity of current global economic conditions and
their impact on the United States, and California, where the majority of the Company’s business is produced. If economic
conditions do not show improvement, there could be an adverse impact on the Company’s financial condition, results
of operations, and liquidity.
• Inflation—The largest cost component for automobile insurers is losses, which include medical costs, replacement
automobile parts, and labor costs. There can be significant variation in the overall increases in medical cost inflation,
and it is often a year or more after the respective fiscal period ends before sufficient claims have closed for the inflation
rate to be known with a reasonable degree of certainty. Therefore, it can be difficult to establish reserves and set premium
rates, particularly when actual inflation rates may be higher or lower than anticipated.
• Loss Frequency—Another component of overall loss costs is loss frequency, which is the number of claims per risk
insured. There has been a long-term trend of declining loss frequency in the personal automobile insurance industry.
However, in recent years, the trend has shown increasing loss frequency, and the Company may not be able to accurately
predict the trend of loss frequency in the future.
• Underwriting Cycle and Competition—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. The Company believes that the market may be hardening as growth has begun to improve throughout 2012.
Technology
In 2012, the Company continued to enhance its internet agency portal, Mercury First. Mercury First is a single entry point
for agents providing a broad suite of capabilities. One of its most powerful tools is a point of sale (POS) system that allows agents
to easily obtain and compare quotes and write new business. Mercury First is designed as an easy-to-use agency portal that provides
a customized work queue for each agency user showing new business leads, underwriting requests and other pertinent customer
information in real time. Agents can also assist customers with processing payments, reporting claims or updating their records. The
system enables quick access to documents and forms and empowers the agents with several self-service capabilities.
The NextGen system is designed to be a multi-state, multi-line system. NextGen serves as the primary platform for all
underwriting, billing, claims, and commission functions supporting the private passenger auto line in seven states (Virginia, New
York, Florida, California, Georgia, Illinois, and Texas).
During 2010, the Company launched Guidewire, a commercially available software solution, to replace legacy platforms
and implemented it for the Nevada homeowners line. In 2011, the Company expanded the Guidewire implementation to Texas,
Georgia, Illinois, Pennsylvania, and Oklahoma for the homeowners line of business and for the Texas commercial auto line of
business. In 2012, the Company continued to expand the Guidewire implementation to California, Oklahoma, Georgia, and Arizona
for the commercial auto line and to Michigan and Nevada for the private passenger automobile line. The Company plans to expand
Guidewire to other states and lines of business during 2013.
In 2012, as part of its continuing commitment to service excellence, the Company enhanced the web capability for customers
in California and Georgia to bind and pay for new policies online. These policies are serviced by the Company’s agents. The
Company plans to expand this capability to other states in the future.
B. Regulatory and Legal Matters
The process for implementing rate changes varies by state, with California, Georgia, New York, New Jersey, Pennsylvania,
and Nevada requiring prior approval from the respective DOI before a rate change may be implemented. Illinois, Texas, Virginia,
Arizona, and Michigan only require that rates be filed with the DOI. Oklahoma and Florida have a modified version of prior
approval laws. In all states, the insurance code provides that rates must not be excessive, inadequate, or unfairly discriminatory. For
the Company’s two largest lines of business, private passenger automobile and homeowners, the Company filed rate increases in
thirteen states during 2012.
The California DOI uses rating factor regulations requiring automobile insurance rates to be determined in decreasing order
of importance by (1) driving safety record, (2) miles driven per year, (3) years of driving experience, and (4) other factors as
determined by the California DOI to have a substantial relationship to the risk of loss and adopted by regulation.
On October 26, 2012, the Company implemented the California DOI approved rate increase of approximately 4% on
California private passenger automobile policies. The rate increase has not had a significant impact on the number of new and
renewal policies written. In October 2012, the Company filed for a 6.9% rate increase in CAIC's private passenger automobile