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.
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 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.
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.