The Turkish insurance sector has undergone serious changes in the last years and the complexity of the applications in the sector has increased because of the financial instability and tax system. In the year 1987, a remarkable insurance reform was made through amendments to the Insurance Supervision Law No. 7397 (the "Law") that had been in effect since 1959. Nevertheless, such changes lagged behind the fast improving insurance sector where the need was evolved for having a new legal framework at the beginning of 1990s. A draft insurance law has been prepared in line with the EU and international standards and presented to the Parliament on 26 May 2006 (the "Draft Law"). Upon promulgation, the Draft Law will replace the Law in its entirety. This article focuses on the corporate structure of insurance and reinsurance companies, insurance agreements and arbitration process in the light of the Draft Law.
For the aim of achieving development of insurance business in Turkey and protecting rights of those insured, the Draft Law foresees principles and procedures with respect to (i) commencement of activities, management, organization, working rules of the real persons and legal entities subject to the Draft Law; and (ii) insurance arbitration process to be implemented in order to dissolve disputes arising from insurance agreements. Insurance companies, reinsurance companies, Turkiye Sigorta ve Reasurans Sirketleri Birligi (The Turkish Insurance and Reinsurance Companies Association), brokers, actuary and insurance experts performing their activities in Turkey shall be subject to the provisions of the Draft Law. Social security organizations, Turkiye Ihracat Kredi Bankası (Turkish Export Credit Bank) and other organizations carrying out insurance activities according to their private law are exempted from the Draft Law.
Corporate Structure of Insurance and Reinsurance Companies
Insurance and reinsurance companies shall be established as joint stock companies or as cooperatives. In order to spread the transparency and provide the liquidity control therein, all shares have to be issued against cash and the shares other than those that are publicly traded be in registered form. Capital adequacy ratios of insurance and reinsurance companies are to be determined by the Undersecretariat of Treasury (the "Treasury"); in any case it shall not less than TRY 5,000,000. The paid-in capital amount of insurance and reinsurance companies must be in compliance with the amount anticipated by the Treasury for each insurance branch.
The Draft Law has re-regulated the qualifications for the founders of insurance companies by considering legislation changes and acquis communitaire. Accordingly, shareholders of those financial institutions, subject to liquidation and preventive measures, holding directly or indirectly, 10% or more of such institutions' shares or voting rights cannot be founder shareholders of insurance companies
License of Insurance and Reinsurance Companies
Insurance and reinsurance companies must obtain license from the Treasury for each insurance branch. Licenses need to be registered with the trade registry and announced in the Trade Registry Gazette and daily newspapers widely distributed. If insurance and reinsurance companies do not apply for license within one year from incorporation, then they are not allowed to use the wording "insurance company" or "reinsurance company" in their trade names.
Insurance and reinsurance companies shall be a member of the Turkish Insurance and Reinsurance Companies Association (the "Association") within one month subsequent to receipt of the license.
Change in Shareholding Structure, Merger and Acquisitions
According to the Draft Law, share transfers shall be subject to the approval of the Treasury, if (a) any third party acquires, directly or indirectly, shares representing 10 %, 20 %, 33 % or 50% or more of an insurance or reinsurance company's share capital; (b) ratio of the shares held by one shareholder equals or exceeds 10 %, 20 %, 33 % or 50% of the share capital of an insurance and reinsurance company; (c) ratio of the shares held by one shareholder falls below the aforesaid percentages; or (d) such transfer grants the acquiree privileged right to appoint a member to the supervision board and board of directors. Failure of obtaining such approval shall result in the denial by the company to register the change in the shareholding structure with the company ledger.
Liquidation of an insurance company, merger with one or more insurance companies or acquisition by another insurance company together with its assets and liabilities or transfer of an insurance portfolio, partially or entirely, to another insurance company shall be subject to the permission of the Ministry to whom the Treasury is bound (the "Ministry"). Otherwise, liquidation, merger, acquisition and portfolio transfer shall be null and void. The same principles are applied to reinsurance companies. The aforesaid transactions could happen among insurance companies or between an insurance company and a pension company.
The main context of insurance agreements is prepared in accordance with the general terms and conditions approved by the Treasury. Nevertheless, the Treasury may transfer this authority to insurance companies. Actually, EU directives do not foresee such an approval mechanism and enable insurance companies to freely determine the general terms and conditions of an insurance agreement. Although the Draft Law tends to be more flexible by granting insurance companies a quasi-EU right of discretion, the minimum general terms and conditions that have to be included in the agreements are determined as follows: (i) scope and exceptions of the insurance coverage undertaken by the insurance company; (ii) type and scope of indemnification liability; (iii) rights and obligations of the parties and premium payments and results of default; (iv) term of the insurance agreement and termination events; (v) governing law and dispute resolution mechanism; and (vi) lapse of time. On the other hand, in terms of insurance tariffs, the Draft Law envisages a more flexible system where such tariff rates would be determined freely by insurance companies in compliance with generally accepted actuarial techniques for achievement of free market economy and adaptation to the developing conditions. Nonetheless, coverage amounts, tariffs and instructions of compulsory insurances that are prepared in accordance with the Draft Law and other laws shall be decided by the Ministry and published in the Official Gazette. In case of necessity, the Treasury might be authorized by the Ministry to approve tariffs, premium, formula and scales of life insurances and personal accident, health and sickness and optional earthquake insurances.
Arbitration process foreseen in the Draft Law will be much more similar to the "insurance ombudsman system" exercised by a number of countries around the world. Pursuant to the Draft Law, the Insurance Arbitration Commission will be established by the Association in order to resolve disputes arising from insurance agreements. The companies dealing with insurance business may apply to the Commission in writing to be a member of the insurance arbitration system. The policyholder who is in dispute with the companies that are member to the insurance arbitration system may benefit from the arbitration process even if there is no specific provision in their insurance agreement.
The insurance arbitration process is formulated by the Draft Law in accordance with the main principles and procedures of arbitration system under the Civil Procedural Law. One may apply to the Commission subsequent to certification of the insurance company's negative response to his claim. The policyholder's application is examined and completed by the reporters within 15 days, at the latest. Those that are not resolved by the reporters shall be submitted to the insurance arbitrator. The Commission may decide to form an arbitration tribunal, consisting of minimum 3 insurance arbitrators. However, if amount of the dispute exceeds TRY 15,000, then formation of an arbitral tribunal shall be compulsory. The arbitrators shall come to a conclusion within 4 months subsequent their appointment, which may be extended upon written approval of the parties to the arbitration. If not, the dispute is resolved by the competent court.
To sum up, it seems that the main endeavor of the Draft Law is to strengthen the regulatory and supervisory framework of insurance and reinsurance companies. Besides, the Draft Law helps the companies that are active in insurance business and policyholder or beneficiaries to be protected in line with the EU insurance directives. Developments are indicators of the growth potential of the sector, which most probably will gain.
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