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Insurance Strategy and Policy
 Insurance
Strategy of OAO LUKOIL and its SubsidiariesOperating activities of OAO LUKOIL ("LUKOIL" or the "Company") and
its subsidiaries, including production, refining and marketing of oil and oil
products, as well as other activities, are associated with a wide range of
financial, social and humanitarian risks. Existence of such risks and
possibility of their occurrence should not prevent OAO LUKOIL from achieving its
goal of becoming one of the leading oil companies of the world. Therefore
the Insurance System for OAO LUKOIL and its subsidiaries should become one of
the most important and integral elements of the general corporate risk
management system. The basis of the Insurance System for LUKOIL and its
subsidiaries (the "System") should be a set of specially developed economically
proven procedures, defined in the form of corporate norms and standards
mandatory for execution by all management bodies of OAO LUKOIL and its
subsidiaries. The System is currently developing, which is reflected
(including others) in the following internal documents:
- Regulations on HSE management system in a vertically integrated oil
company, OAO LUKOIL (approved by the President of OAO LUKOIL in 1999);
- Regulations on the procedure for investigation, accounting and
compensation of losses resulting from the incidents, operational faults,
accidents, emergencies in OAO LUKOIL's subsidiaries (approved by OAO LUKOIL
Order No. 35 dated 21.01.2000);
- Regulations on control and management of operational risks of OAO LUKOIL
and its subsidiaries (approved by OAO LUKOIL Order No.166 dated 06.08.2001).
Integrity of insurance protection of OAO LUKOIL and its subsidiaries,
independence of the System from the current status of OAO LUKOIL and its subsidiaries may be achieved
provided that a certain mission becomes a basis of this System. The mission of
the newly developed System should reflect its purpose, necessity and utility for
the society as a whole and, in particular, for OAO LUKOIL and its
subsidiaries. The mission of the Insurance System of OAO LUKOIL and its
subsidiaries can be defined as follows:
- To ensure stable operation and development of OAO LUKOIL and its
subsidiaries by economically effective insurance coverage against risks which
have a negative effect on the business of OAO LUKOIL and its subsidiaries,
health of personnel, shareholders' and investors' interests.
The
System should combine:
- Management bodies of OAO LUKOIL, its subsidiaries and their operating
divisions
- Divisions of OAO LUKOIL and its subsidiaries, which are entrusted with
ensuring risk control and management, as well as insurance protection against
risks which have a negative effect on the business, health of personnel of OAO
LUKOIL and its subsidiaries, and shareholders' and investors' interests;
- Division which implements control (calculation) of operational and
environmental risks;
- Insurance companies, protecting OAO LUKOIL and its subsidiaries,
personnel, as well as property interests of the shareholders and investors.
The listed participants should act and co-operate on a single
specially created information, procedural and regulatory basis. The
Fundamentals on the Insurance Strategy and Policy of OAO LUKOIL and its
subsidiaries should be reviewed and approved by the Management Board of OAO
LUKOIL. The mission is completed through reaching the following
objectives:
- Identification of all risks which might present a threat to the business,
i.e. to the stability of OAO LUKOIL and its subsidiaries;
- Complete and timely compensation of all financial losses (including damage
resulting from loss of crude oil, intermediate or end products; costs of
localization of accidents and liquidation of their consequences, as well as
associated mandatory costs, etc.) resulting from emergencies. Compensation
shall be effected by transfer of unplanned costs (time-wise and volume-wise)
for the coverage of probable losses to the category of planned and
economically feasible insurance payments;
- Recovery of property to the pre-accident condition;
- Full compensation of legal liability for inflicting damage to the life,
health and property of other persons and the environment;
- Full compliance with the requirements of OAO LUKOIL's Social Code with
respect to insurance of personnel of OAO LUKOIL and its subsidiaries.
The main principles of implementation of the defined mission are as
follows:
- Insurance protection through conclusion of relevant insurance agreements.
This implies transfer for insurance premium of risks to external insurance
markets. Transfer to external markets of potential losses from the risks of
man-caused character, natural calamities, civil liability risks etc. shall be
done for potentially large financial losses, their size being identified by
the Management Board of OAO LUKOIL. Transfer of risks to the external
insurance markets for insurance premium shall be done on a tender basis;
- Insurance protection by self-insurance. This implies creation of reserve
insurance funds of OAO LUKOIL and its subsidiaries to compensate losses
associated with the effects of identified and eventual risks. These reserves
shall be formed to cover the losses of the size defined by OAO LUKOIL's
Management Board, with gradual increase of boarder between insured and
self-insured risks;
- Packaging of similar risks to minimize the insurance costs;
- Allocation of costs for insurance protection of OAO LUKOIL and its
subsidiaries in an annual budget as a separate line.
Insurance
Policy of OAO LUKOIL and its Subsidiaries
The insurance policy is a way to implement the strategy in a
specific time period and defines the following basic factors:
- The list of risks which may have a negative effect on the business of OAO
LUKOIL and its subsidiaries and health of personnel, as well as shareholders'
and investors' interests. This implies definition of risks for the property
complex, risks of civil liabilities, specific risks;
- Types of insurance adequate to the risks associated with operating
activities of OAO LUKOIL and its subsidiaries, including types of insurance of
property, liabilities, specific risks;
- Limits of required and economically feasible insurance payments for the
selected types of insurance;
- Franchise amounts for the risks transferred for insurance broken down by
groups of assets.
The Management Board of OAO LUKOIL shall review in
compliance with the established procedure the current insurance policy every
year for the coming year. This review shall result in taking the insurance
program for OAO LUKOIL and its subsidiaries as a base by OAO LUKOIL's Board for
the coming year. During implementation of the insurance policy of OAO
LUKOIL and its subsidiaries, its units, which are obliged to control and manage
the risks, as well as to provide insurance protection from the risks which are
presenting a threat to the business and health of personnel of OAO LUKOIL and
its subsidiaries, as well as property interests of the shareholders and
investors, shall perform the following functions:
- Analyze information on the risks which may have a negative effect on the
business of OAO LUKOIL and its subsidiaries and health of personnel, as well
as types of insurance adequate to such risks;
- Develop proposals on the amount of losses subject to self-insurance in the
current year;
- Develop proposals on the limits of required and economically feasible
insurance payments and franchise amounts for the risks transferred to
insurance in the current year;
- Organize and hold tenders associated with insurance protection of OAO
LUKOIL and its subsidiaries;
- Present a list of companies specially authorized to provide insurance
protection of OAO LUKOIL and its subsidiaries in the specific time period;
- Control the acquisition of insurances by the authorized insurance
companies in the course of re-insurance;
- Control the activities of corporate self-insurance structures;
- Analyze current and potential status of the world insurance markets;
- Control timely notification of losses of OAO LUKOIL and its subsidiaries,
the status of reconciliation and payment of agreed losses.
The list of
potential external insurers (re-insurers) of the risks of OAO LUKOIL and its
subsidiaries was defined on the basis of assessment of their reliability,
financial stability, rating etc. The mandatory requirements to the
insurance companies (in addition to the above mentioned) providing insurance
protection for OAO LUKOIL and its subsidiaries (companies specially authorized
to perform insurance protection for OAO LUKOIL and its subsidiaries) are:
- Experience of co-operation with a large corporate client from highly risky
sectors of economy (primarily from the oil industry);
- Ability of the insurance company to perform constant and effective
monitoring of insured risks of OAO LUKOIL.
The purchase of insurance
policies from commercial international insurance companies shall be performed in
case of their compliance with the current rating of
Standard&Poor's. Re-insurance of risks, insured by the authorized
companies, shall become an obligation of the authorized companies. The
international insurers shall comply with similar reliability requirements, used
in the course of direct purchase of such companies' insurances. Insurance
coverage of LUKOIL Group companies in 2010
In
2010 insurance coverage of the LUKOIL Group organizations complies with the
requirements of the special program approved by the decision of the OAO LUKOIL
Management Committee.
The
insurance coverage program of the LUKOUL Group in 2010 (hereafter, the Program)
is aimed at ensuring economically efficient insurance coverage for the LUKOIL
Group organizations in 2010 against the risks posing a threat to the business of
the LUKOIL Group organizations, lives and health of their employees, as well as
to the property interests of shareholders (participants) of the LUKOUL Group
organizations and investors.
The
following types of insurance coverage have been identified in 2010 as the types
of insurance coverage corresponding to the risks accompanying the operating
activities of LUKOIL Group, as well as the types of insurance coverage whose
implementation is determined by the requirements of respective financial
institutions :
ü compulsory
insurance (compulsory civil liability insurance for vehicle owners, compulsory
insurance against the damage inflicted during maintenance of hazardous
production facilities);
ü insurance
of property interests of the LUKOIL Group organizations against catastrophic
risks (property insurance for refineries and petrochemical organizations;
property insurance for gas processing plants belonging to the Upstream and
Downstream business segments; property insurance for the organizations belonging
to the Electric Power business sector; property and liability insurance for
shipowners and offshore gas and oil producing organizations; voluntary liability
insurance for the organizations' terminal operators; liability insurance for the
organizations' aviation fuel transporters);
ü
liability
insurance for directors, officers and corporations in relation to OAO
LUKOIL;
ü
socially
important types of insurance (voluntary health insurance for employees, accident
insurance for employees);
ü
insurance
of property interests of oil and gas producing organizations and petroleum
products supplying organizations of LUKOIL Group against the risks posing a
threat to their businesses, etc.
Particular
types (trends) of insurance coverage are ensured in view of the results
of:
ü
asset
valuation for insurance purposes (valuation is conducted by independent
valuation companies recognized within the international and domestic markets of
valuation services);
ü
surveying
of high-risk facilities and control over compliance with the recommendations of
an independent surveyor (surveying is conducted by independent surveying
organizations, international global brokers and major reinsurance
companies).
The
new Program will provide increased volumes of insurance coverage for
property-related insurance types. For instance, the limit of liability with
regard to the property insurance of refineries, petrochemical plants and gas
processing plants against all risks for one insured event was raised to the
equivalent of USD 700 million.
Due
to the adjustment of liability limits, the limit of liability insurance for
terminal operators for one insured event by independent surveying organizations
and international global brokers. For instance, the limit for OAO RPK-Vysotsk
LUKOIL-II was raised from the equivalent of USD 70 million to the equivalent of
USD 117 million.
The
Program also comprises socially important types of insurance, such as voluntary
health insurance and accident insurance for employees. The minimum liability
limit for accident insurance for employees was raised from RUR 200,000 to RUR
250,000.
Insurance
coverage is one of the most important and inherent components of the general
corporate risk management system of LUKOIL Group.
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