Erste Bank JPMorgan Merrill Lynch International

IBNR provisions are formed to offset the expected costs of losses that have already occurred but
have not yet been reported. These provisions, exactly like the provisions for reported insurance
claims, are formed to offset the expected costs (including the claim expenses) that are necessary to
finally settle these claims. Because at the time the provisions were formed the losses by definition are
as yet unknown, the Group calculates the IBNR liabilities based on historical claims experience,
adjusted by current developments in terms of claims-related factors. These provisions are based on
estimates that were made using actuarial and statistical forecasts of the expected costs to finally settle
these insurance claims. The analyses are based on the facts and circumstances known at the time
and on expectations of the trend of legal and/or economic factors affecting the level of loss, such as
case law, the rate of inflation and labour costs. These provisions are regularly reviewed and revised
as soon as additional information is known and insurance claims are actually reported.
The time required to learn about these insurance claims and to settle them is an important factor
that must be taken into account when forming provisions. Insurance claims that are easy to settle,
such as property damage in automobile insurance, are reported within a few days or weeks and are
normally settled within a year.
Complicated insurance claims, such as bodily injury in automobile or general liability insurance
typically requires longer settlement times (on average four to six years, sometimes significantly
longer). Also, difficult insurance claims where settlement regularly depends on the results of often
protracted litigation, leads to substantially longer settlement times, especially in the liability, accident,
building and professional liability insurance segments. The ultimate costs of the claims and claim
expenses depend on a series of variable circumstances. Between the time a claim is reported and
final settlement, changing circumstances require that the provisions that were formed be revised
upwards or downwards. For example, changes in the law, the outcome of litigation and changes in
medical costs, costs for materials for auto and house repair and hourly wage rates can have a
substantial effect on the costs of insurance claims. These factors may result in the actual trend
differing from expectations — sometimes substantially. The estimates of loss provisions are reviewed
and updated using the most recent information available to the management. Any changes to the
estimate of provisions are reflected in the operating results. The Wiener Städtische Group’s conservative
policy toward provisions is documented not least by the fact that the handling of the loss provision
has regularly resulted in profits on loss reserves.
Based on the Group’s internal procedures, the management comes to the conclusion with the
information currently available, that the Group’s provisions in the property and casualty division are
appropriate. However, forming loss provisions is by nature an uncertain process; therefore, no
guarantee can be given that in the end losses will not differ from the Group’s initial estimates.
Development of the gross-loss provision
The following table shows the development of the Wiener Städtische Group’s loss provision at the
end of each year indicated. The provisions reflect the amount of expected losses from the direct
business, based on insurance claims that occurred in the current and all previous years of loss
occurrence which were not paid as of the reporting date, including the IBNR.
Evaluating the information contained in this table because each amount contains the effects of all
changes from the previous periods. The circumstances and trends that in the past affected liability
could possibly reoccur in the future and therefore no conclusions can be drawn from the information
given in this table.
2005 2004 2003 2002 2001 2000
in EUR ’000
Loss provision in the
current year . . . . . . . . . . 1,831,925.20 1,573,947.34 1,381,109.59 1,474,293.22 1,107,320.61 1,067,420.22
1 year later . . . . . . . . . . . . . 973,714.58 838,243.53 773,345.70 654,648.25 600,686.98
2 years later . . . . . . . . . . . . 590,179.53 527,853.22 459,769.72 411,505.89
3 years later . . . . . . . . . . . . 400,567.06 330,233.24 317,869.85
4 years later . . . . . . . . . . . . 263,095.92 239,291.41
5 years later . . . . . . . . . . . . 197,756.49
Claims payments ........ 462,247.56 932,689.91 1,800,806.41 1,629,547.94 1,991,313.63
1 year later . . . . . . . . . . . . . 462,247.56 424,872.99 534,128.25 344,648.32 335,038.03
2 years later . . . . . . . . . . . . 507,816.92 614,539.20 403,205.39 391,041.84
3 years later . . . . . . . . . . . . 652,138.96 427,662.21 405,658.19
4 years later . . . . . . . . . . . . 454,032.02 422,796.90
5 years later . . . . . . . . . . . . 436,778.67
F-186