THG 2018 Annual Report

Our businesses are heavily regulated, and changes in regulation may reduce our profitability. Our insurance businesses are subject to supervision and regulation by the state insurance authority in each state where we transact EXVLQHVV 7KLV V\VWHP RI VXSHUYLVLRQ DQG UHJXODWLRQ UHODWHV WR QXPHURXV DVSHFWV RI DQ LQVXUDQFH FRPSDQ\¶V EXVLQHVV DQG ILQDQF ial condition, including limitations on the authorization of lines of business, underwriting limitations, the ability to utilize credit-based insurance scores or other factors in underwriting, the ability to terminate agents, supervisory and liability responsibilities for agents, the setting of premium rates, the requirement to write certain classes of business that we might otherwise avoid or charge different premium rates, restrictions on the ability to withdraw from certain lines of business or terminate policies or classes of policyholders, the establishment of standards of solvency, the licensing of insurers and agents, compensation of and contractual arrangements with, independent agents, concentration of investments, levels of reserves, the payment of dividends, transactions with affiliates, changes of control, protection of private information of our agents, policyholders, claimants and others (which may include highly sensitive ILQDQFLDO RU PHGLFDO LQIRUPDWLRQ RU RWKHU SULYDWH LQIRUPDWLRQ VXFK DV VRFLDO VHFXULW\ QXPEHUV GULYLQJ UHFRUGV GULYHU¶V OLFH nse numbers, etc.) and the approval of policy forms. From time to time, various states and Congress have proposed to prohibit or otherwise restrict the use of credit-based insurance scores in underwriting or rating our Personal Lines business. The elimination of the use of credit-based insurance scores could cause significant disruption to our business and our confidence in our pricing and underwriting. Most insurance regulations are designed to protect the interests of policyholders rather than stockholders and other investors. Legislative and regulatory restrictions are constantly evolving and are subject to then current political pressures. For example, following PDMRU HYHQWV VWDWHV KDYH FRQVLGHUHG DQG LQ VRPH FDVHV DGRSWHG SURSRVDOV VXFK DV KRPHRZQHUV¶ ³%LOO RI 5LJKWV ´ UHVWULFWLRQV on storm deductibles, additional mandatory claim handling guidelines and mandatory coverages. More recently, the California Insurance Commissioner requested that all insurers operating in California voluntarily divest from any investments they may have in thermal coal, and the New York Department of Financial Services and regulatory agencies in other states have enacted comprehensive cybersecurity UHJXODWLRQV 6XFK DFWLRQV DOVR RFFXU DW WKH IHGHUDO OHYHO VXFK DV WKH 8 6 'HSDUWPHQW RI +RXVLQJ DQG 8UEDQ 'HYHORSPHQW¶V SUR posal that may increase the legal risk of providing homeowners and commercial residential property insurance by imposing liability for discrimination on the basis of a disparate-impact theory even without evidence of discriminatory intent. Some states are also considering mandating owners of firearms to purchase liability insurance and various other states strictly scrutinize first party coverages under such policies. In addition, The Dodd-Frank Wall Street Reform and Consumer Protection Act provides for enhanced regulation for the financial services industry through initiatives including, but not limited to, the creation of a Federal Insurance Office and several federal oversight agencies, the requiring of more transparency, accountability and focus in protecting investors and businesses, input of shareholders regarding executive compensation, and enhanced empowerment of regulators to pursue those who engage in financial fraud and unethical business practices. The SEC adopted regulations designed to encourage, rewar G DQG SURWHFW ³ZKLVWOHEORZHUV´ ZKHWKHU RU QRW they first report the potential infraction to the company for correction or remedial action. $OVR WKH IHGHUDO 0HGLFDUH 0HGLFDLG DQG 6WDWH &KLOGUHQ¶V +HDOWK ,QVXUDQFH 3URJUDP ([WHQVLRQ $FW PDQGDWHV UHSRUWLQ g and other requirements applicable to property and casualty insurance companies that make payments to or on behalf of claimants who are eligible for Medicare benefits. These requirements have made bodily injury claim resolutions more difficult, particularly for complex matters or for injuries requiring treatment over an extended period, and impose significant penalties for non-compliance and reporting errors. These requirements also have increased the circumstances under which the federal government may seek to recover from insurers amounts paid to claimants in circumstances where the government had previously paid benefits. In January 2013, the Strengthening Medicare and Repaying Taxpayers Act was signed into law and provided for implementation over a staggered period of time. We are continuing to monitor the effect of this law on our ability to settle cases and our exposure to federal recoupment claims. State regulatory oversight and various proposals at the federal level may in the future adversely affect our ability to sustain adequate returns in certain lines of business or in some cases, operate lines profitably. In recent years, the state insurance regulatory framework has come under increased federal scrutiny, and certain state legislatures have considered or enacted laws that alter and, in many cases, increase state authority to regulate insurance companies and insurance holding company systems. Our business could be negatively impacted by adverse state and federal legislation or regulation, or judicial developments, including those resulting in: x GHFUHDVHV LQ UDWHV LQFOXGLQJ IRU H[DPSOH UHFHQW UHJXODWRU\ RU EXUHDX DFWLRQV WR PDQGDWH UHGXFHG SUHPLXPV IRU ZRUNHUV¶ compensation insurance; x limitations on premium levels; x coverage and benefit mandates; x limitations on the ability to manage care and utilization or other claim costs; 22 THE HANOVER INSURANCE GROUP | 2018 ANNUAL REPORT