Mercury Insurance 2013 Annual Report Download - page 25

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10
are unable to perform their obligations under a reinsurance treaty, the Company will be required, as primary insurer, to discharge
all obligations to its policyholders 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 provides that insurers are required to give at least a 20% discount to “good drivers,” as defined, from rates that would
otherwise be charged to such drivers and that no insurer may refuse to insure a “good driver.” The Company’s rate plan operates
under these rating factor regulations.
The Company filed for a 3.9% rate increase for its California homeowners line of business in May 2009. After a rate hearing
by an Administrative Law Judge (“ALJ”), the Company was ordered by the California Insurance Commissioner to reduce rates
by 5.5%, which was implemented during the second quarter of 2013. The Company is challenging in Superior Court some of the
issues that were raised by the ALJ in the rate hearing. The Company subsequently filed for a rate increase that contained more
recent data, and an 8.26% rate increase was approved by the California Insurance Commissioner. The rate increase went into effect
in January 2014.
In January 2013, the California DOI approved an auto body repair regulation intended to strengthen consumer protection.
This regulation requires insurers to settle automobile insurance claims using repair standards described by the regulation and not
by the insurers' own standards. The new ruling became effective in March 2013. While the impact of the new ruling was minimal
during 2013, it may increase the cost of parts for auto repairs in the future.
Insurance rates in Georgia, New York, New Jersey, Pennsylvania, and Nevada require prior approval from the state DOI,
while insurance rates in Illinois, Texas, Virginia, Arizona, and Michigan must only be filed with the respective DOI before they
are implemented. 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.
The DOI in each state in which the Company operates is responsible for conducting periodic financial and market conduct
examinations of the Insurance Companies in their states. Market conduct examinations typically review compliance with insurance
statutes and regulations with respect to rating, underwriting, claims handling, billing, and other practices. The following table
presents a summary of current financial and market conduct examinations:
State Exam Type Period Under Review Status
CA Financial 2011 to 2013 Fieldwork will begin in the first quarter of 2014.
FL Financial 2011 to 2013 Fieldwork will begin in the first quarter of 2014.
TX Financial 2011 to 2013 Fieldwork will begin in the first quarter of 2014.
CA Market Conduct 2012 to 2013 Fieldwork will begin in the first quarter of 2014.
During the course of and at the conclusion of these examinations, the examining DOI generally reports findings to the
Company, and none of the findings reported to date is expected to be material to the Company’s financial position.
For a discussion of current regulatory matters in California, see “Regulatory and Legal Matters” in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”