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I. Graifer, Chairman of the Board of directors of LUKOILV. I. Graifer, Chairman of the Board of directors of LUKOILV. Alekperov, President of OAO LUKOIL V. Alekperov, President of OAO LUKOIL Oilmen of LUKOILOilmen of LUKOILProduction facilities of the Caspian Yuri Karchagin fieldProduction facilities of the Caspian Yuri Karchagin fieldOffshore platforme D6 in the Baltic Sea. Kratsovskoe fieldOffshore platforme D6 in the Baltic Sea. Kratsovskoe field Permnefteorgsintez Refinery Permnefteorgsintez RefineryVolgograd RefineryVolgograd Refinery Uhtaneftepererabotka Refinery Uhtaneftepererabotka Refinery Nijnegorodnefteorgsintez Refinery Nijnegorodnefteorgsintez RefineryMini refineries in KogalymMini refineries in KogalymPetrotel-LUKOIL (Romania)Petrotel-LUKOIL (Romania)LUKOIL Neftokhim Burgas (Bulgaria)LUKOIL Neftokhim Burgas (Bulgaria)Odessa Refinery (Ukraine)Odessa Refinery (Ukraine)Filling station commissioning in New-YorkFilling station commissioning in New-YorkChange of brand of a filling station in the USAChange of brand of a filling station in the USAIgor Sechin, Deputy Chairman of the RF Government, visits LUKOIL's fixed offshore ice-resistant platform in the Caspian Sea. December 16, 2009Igor Sechin, Deputy Chairman of the RF Government, visits LUKOIL's fixed offshore ice-resistant platform in the Caspian Sea. December 16, 2009LUKOIL’s arctic fleet welcomes ice-breaker “Varandey”, February 3, 2009LUKOIL’s arctic fleet welcomes ice-breaker “Varandey”, February 3, 2009Commissioning of the Yuzhno Khulchuyu Field. June 20, 2008Commissioning of the Yuzhno Khulchuyu Field. June 20, 2008The first large-tonnage oil shipment through the FOIROT (Varandey Oil Export Terminal). June 9, 2008The first large-tonnage oil shipment through the FOIROT (Varandey Oil Export Terminal). June 9, 2008Commissioning of KHAUZAK gas field in Uzbekistan. November 29, 2007Commissioning of KHAUZAK gas field in Uzbekistan. November 29, 2007Mounting of mooring cargo handling system on the FOIROT (Varandey Oil Export Terminal)Mounting of mooring cargo handling system on the FOIROT (Varandey Oil Export Terminal)Loading of FOIROT onto sea-going barges (Varandey Oil Export Terminal)Loading of FOIROT onto sea-going barges (Varandey Oil Export Terminal)Construction of Varandey TerminalConstruction of Varandey TerminalCommissioning of a catalytic reforming installation at the Volgograd RefineryCommissioning of a catalytic reforming installation at the Volgograd RefineryNakhodkinskoye gaz field commissioningNakhodkinskoye gaz field commissioningOil Spill Response Exercise in the Caspian SeaOil Spill Response Exercise in the Caspian SeaInternational training exercises at Varandey oil export terminalInternational training exercises at Varandey oil export terminalAnti-terrorism exercises at Vysotsk oil terminalAnti-terrorism exercises at Vysotsk oil terminalInternational anti-terrorism exercises at Volgograd RefineryInternational anti-terrorism exercises at Volgograd RefineryInternational exercise at RPK-Vysotsk LUKOIL-IIInternational exercise at RPK-Vysotsk LUKOIL-IIFire-prevention trainings in Kaliningrad RegionFire-prevention trainings in Kaliningrad RegionExercises “Kaliningrad 2004”Exercises “Kaliningrad 2004”Post cardsPost cardsSecuritiesSecuritiesPhotoPhotoShareholder Relations Policy of OAO LUKOILShareholder Relations Policy of OAO LUKOILAnnual General Shareholders MeetingAnnual General Shareholders MeetingPresentationsPresentationsInvestor Trips to Sites Investor Trips to Sites Financial CalendarFinancial CalendarFinancial and Operating InformationFinancial and Operating InformationLUKOIL Stock QuotesLUKOIL Stock QuotesShareholders EquityShareholders EquityAnalyst CoverageAnalyst CoverageFAQFAQUzbekistanUzbekistanPerm Perm Karachaganak Karachaganak West SiberiaWest SiberiaEgyptEgyptFinancial FundamentalsFinancial FundamentalsOperating HighlightsOperating HighlightsHistory of Share Capital History of Share Capital ShareholdersShareholdersCompany SecuritiesCompany SecuritiesOil and Gas ReservesOil and Gas ReservesExplorationExplorationOil ProductionOil ProductionGas Production Gas Production Oil RefiningOil RefiningOils and lubricantsOils and lubricantsGas Processing Gas Processing PetrochemicalsPetrochemicalsCrude Oil DeliveriesCrude Oil DeliveriesGas DeliveriesGas DeliveriesPetroleum Product MarketingPetroleum Product MarketingPersonnel Management PolicyPersonnel Management PolicySocial Code of OAO LUKOIL Social Code of OAO LUKOIL Sustainability ReportSustainability ReportCharity and Social ActivitiesCharity and Social ActivitiesSportsSportsCorporate retirement programCorporate retirement programCompany Policy Company Policy Caring for the Environment Caring for the Environment Åcological monitoringÅcological monitoringCertificationCertificationAssociated SitesAssociated SitesSubsidiaries' WebsitesSubsidiaries' Websites
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Insurance Strategy and Policy

Insurance Strategy of OAO LUKOIL and its Subsidiaries

Operating 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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