Mercury Insurance 2013 Annual Report Download - page 46

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31
to limit spending. Further, softness in the European banking sector and the Japanese fiscal condition continue to lead
to weaker global economic growth, heightened financial vulnerabilities and some negative 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 is mixed with carriers both raising and decreasing rates depending on
individual state profitability and the carriers’ growth appetite.
Technology
Agency systems
In 2013, the Company continued to invest in its web-based agency systems by adding new capabilities and enhanced features
such as improved motor vehicle and accident matching and reconciliation. Many agents use comparative raters to evaluate products
and prices from different insurance carriers, and the Company has completed integrations with the most popular raters for the
private passenger automobile and homeowner lines of business.
A new commission system is anticipated to be released in 2014 that will enhance the efficiency and flexibility of the current
commission calculation and payment process.
Customer systems
Customer web capability was expanded in 2013 and allows customers in California, Georgia, and Nevada to bind and pay
for new private passenger automobile policies on-line.
Operations systems
Guidewire, a commercially available software solution, was launched in 2010 to replace legacy platforms. As of December
31, 2013, Guidewire for homeowners has been deployed in nine of the Company’s states, for commercial automobile in ten states
including California, and for personal automobile in five states. In the next two years, the Company plans to implement Guidewire
for California homeowners and private passenger automobile claims processing.
B. Regulatory and Legal Matters
The process for implementing rate changes varies by state. Insurance rates in California, 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 state 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. For the Company’s two largest lines of business, private passenger automobile and homeowners, the Company
filed rate increases in thirteen states during 2013.
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.
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 ALJ, the Company was ordered by the California Insurance Commissioner to reduce rates by 5.5%. The rate reduction was
implemented during the second quarter of 2013. The Company subsequently filed for a rate increase that contained more recent