Mercury Insurance 2015 Annual Report Download - page 43

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• Inflation—The largest cost component for automobile insurers is losses, which include medical, 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. Loss frequency trends are affected by many factors such as fuel prices, the economy, the prevalence of distracted
driving and collision avoidance technology in vehicles. Loss frequency generally increased in 2015.
• 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 market
conditions. The Company believes that the market is hardening with carriers generally raising rates, although this also
depends on individual state profitability and the carriers’ growth appetite.
Technology
Agency systems
A new agent incentive management system was introduced in 2014 and enhanced in 2015 to better manage agency
information, to continue to improve the agent experience and to provide for more flexible ways to compensate agents.
Operational systems
In 2015, the Company continued to invest in Guidewire, a commercial software solution that was launched in 2010 to
replace legacy platforms, by adding new capabilities and enhanced features, including paperless workflow, to meet evolving
business needs and regulatory changes. For private passenger automobile insurance, the Guidewire policy, billings and claims
modules had been implemented in all states outside of California. California private passenger automobile claims processing was
converted to the Guidewire claims module in 2015 and the Company expects to implement the policy and billings modules within
the next two years.
B. Regulatory and Legal Matters
The process for implementing rate changes varies by state. For more detailed information related to insurance rates approval,
see "Item 1. Business—Regulation."
During 2015, the Company implemented rate changes in thirteen states. In California, the following rate increases were
implemented:
In May, a 6.4% rate increase on its preferred private passenger automobile line of insurance business, which
represented approximately 50% of the total Company net premiums earned.
In August, a 6.9% rate increase on its standard private passenger automobile line of insurance business, which
represented approximately 15% of the total Company net premiums earned.
In April 2010, the California DOI ("CDI") issued a Notice of Non-Compliance ("2010 NNC") to MIC, MCC, and CAIC
based on a Report of Examination of the Rating and Underwriting Practices of these companies issued by the CDI in February
2010. The 2010 NNC included allegations of 35 instances of noncompliance with applicable California insurance law and sought
to require that each of MIC, MCC, and CAIC change its rating and underwriting practices to rectify the alleged noncompliance
and reserved the right to seek monetary penalties. In April 2010, the Company submitted a Statement of Compliance and Notice
of Defense to the CDI, in which it denied the allegations contained in the 2010 NNC and provided specific defenses to each
allegation. The Company also requested a hearing in the event that the Statement of Compliance and Notice of Defense did not
establish to the satisfaction of the CDI that the alleged noncompliance did not exist, and the matters described in the 2010 NNC
were not able to be resolved informally with the CDI. While continuing to dispute the CDI's allegations, the Company implemented
various changes requested by the CDI and engaged in settlement discussions in the interest of avoiding further litigation. On
March 2, 2015, MIC, MCC and CAIC entered into an agreement with the CDI, pursuant to which all allegations in the 2010 NNC
were settled for $1 million, which was subsequently paid, and the case was resolved.
In March 2006, the CDI issued an Amended Notice of Non-Compliance to a Notice of Non-Compliance originally issued
in February 2004 (as amended, "2004 NNC") alleging that the Company charged rates in violation of the California Insurance
Code, willfully permitted its agents to charge broker fees in violation of California law, and willfully misrepresented the actual
price insurance consumers could expect to pay for insurance by the amount of a fee charged by the consumer’s insurance broker.
The CDI sought to impose a fine for each policy on which the Company allegedly permitted an agent to charge a broker fee, to
impose a penalty for each policy on which the Company allegedly used a misleading advertisement, and to suspend certificates