Liberalization of the regulations governing the insurance sector commenced in the 1980s, in parallel with legal reform of other financial sectors. Primarily the banking and securities industries were affected as the possibility of Turkey's accession to the European Union gained credibility. This liberalization trend ultimately spread throughout the broader financial markets, and gathered momentum in the early 2000s.
As a part of Turkey's integration obligations to the EU, and to fulfill one of its commitments undertaken vis-à-vis the International Monetary Fund (the "IMF"), Turkey passed Insurance Law No. 5684 on 14 June 2007 (the "Law"). Both the IMF and the EU had been highlighting the importance of a financial system where banks and non-banking institutions have a solid financial status and are effectively supervised by regulatory authorities. Turkey's annual Progress Report, prepared by the European Commission as a part of the screening process, states that non-banking financial institutions while still relatively small (including insurance and reinsurance companies), are increasingly dynamic and growing rapidly.
In response to growing pressures for a new regulatory structure, Turkey took decisive action. The Law, now the main legislation in the insurance sector, replaces the former Insurance Supervision Law No. 7397 (the "Former Law"), which failed to satisfy the needs of this rapidly evolving industry. The Undersecretariat of Treasury of the Prime Ministry (the "UT"), in its press release in June of 2007, stated that the new legal framework will enable the legislation to accommodate the vibrant nature of the sector. Thus, this structure also eases the assimilation of the amendments to the EU legislation into the applicable Turkish insurance legislation.
Upon enactment of the Law, the General Directorate of Insurance of the UT, as the main regulator of the insurance and pension sector, commenced passing secondary legislation. It appears that based upon the wording of the Law, this process will continue for at least another year.
What Do The Law And Secondary Legislation Introduce?
The Law applies to all of the same parties as in the Former Law: insurance companies and agencies, reinsurance companies, the Association of Turkish Insurance and Reinsurance Companies1, brokers, actuaries and insurance consultants. Experts in the market believe that the Law is written in such a way so as to better protect the rights of the insurance holders and the beneficiaries.
New Features Introduced Regarding The Protection Of The Insurance Holders And Beneficiaries
The Law is quite liberal with its consumer-friendly provisions. For instance, the Regulation regarding Information and Disclosure in Insurance Agreements that was recently enacted by the UT provides that insurance companies, brokers and agencies cannot give false or misleading information which violates the rules of fair competition. Another interesting provision of the Law provides that insurance agreements cannot include foreign words; the Turkish equivalents of foreign words are to be used. The Law also requires insurance companies not to delay payment of the insurance indemnities in breach of the principles of good faith.
The most controversial provision of the Law is Article 11 which provides "In insurance agreements, the uncovered risks are to be explicitly indicated as well as the covered risks. The risks that are not stated as being excluded are deemed to have been covered." This very protective provision for insurance holders shocked the market. The market strongly criticized this provision based on the fact that they cannot and should not be expected to anticipate all of the possible specific risks and damages that might occur to an insured party. Moreover, such provision is unprecedented in the insurance business internationally. Reinsurance companies may not be willing to provide collateral to insurance companies which have not identified all risks. At first glance, insurance companies seem to be correct and reasonable in their concern. Therefore, the legislative authorities must clarify the scope of this provision, working in concert with the insurance industry.
Introduction Of Arbitration Procedures To The Insurance Sector
One of the most welcomed new aspects of the Law is the introduction of arbitration procedures to the insurance agreements. Arbitration procedures can be applied to disputes between insurance beneficiaries and the insurer. The UT recently enacted the Regulation regarding Arbitration in the Insurance Sector, detailing the arbitration procedures. It should be noted that an arbitration will not supersede the competence and authority of judicial courts. An insurance arbitration commission (the "Commission") will be established within the Association of Turkish Insurance and Reinsurance Companies. The Commission will be responsible for the fair, impartial, and effective operation of the arbitration tribunal. It is obligatory for insurance holders and/or beneficiaries to seek remedies with the relevant insurance company before filing an application with the Commission. If the dispute cannot be resolved, partially or in whole, by this settlement procedure, the relevant insurance holder or beneficiary may apply to the Commission. Arbitrators and reporters, who are not necessarily jurists, are available and authorized to resolve the disputes. The applications are first evaluated by reporters, and any dispute that cannot be resolved by the reporters must be forwarded to an arbitration tribunal composed of at least three persons.
Amendments On The Legal And Organizational Structure Of Insurance And Reinsurance Companies
The Law decreases the level of bureaucracy in the procedure for incorporation of insurance or reinsurance companies. The Former Law required insurance companies to obtain an incorporation permit from the UT as a pre-requisite for the establishment of an insurance company. The recently enacted Law abolishes this pre-requisite. Companies established in accordance with Turkish commercial laws, regardless of whether or not they have foreign shareholders, may apply to the UT for a certificate of activity to render insurance company services.
The Law requires that founders of insurance and reinsurance companies must have the necessary financial strength required to maintain such an enterprise, and sets forth the conditions for revocation of a license. It addresses technical issues and requires that companies must establish internal auditing and risk management systems. The internal audit services may be outsourced to companies under certain conditions.
The Regulation on Principles of Incorporation and Operation of Insurance and Reinsurance Companies gives more detailed provisions regarding incorporation, license application, amendment of articles of association, mergers, acquisitions and portfolio transfers, as well as the indirect shareholding of insurance and reinsurance companies.
The Law requires the creation of the Security Fund (the "Fund") and expands the size and scope of the Guarantee Fund established under the former legislation. According to the Law and Regulation on the Security Fund, this Fund ensures that payments are made, which have arisen from compulsory insurance purchased within the scope of the Highway Traffic Law, the Highway Carriage Law and other compulsory insurance set out under the former legislation. The revenues of the Fund consist mainly of a certain percentage of premiums earned by insurance companies, and a participation fee paid by insurance holders.
Financial Strength And Supervision Of Insurance And Reinsurance Companies
Since insurance and reinsurance companies must have a strong financial base, the Law requires that companies must meet certain capital requirements for each branch to be opened, in addition to the minimum paid-in capital requirements. In circumstances where the technical reserves are re-regulated, new types of technical reserves are also introduced. Upon the enactment of the Law, cases involving the deterioration of the financial status of existing insurance companies have been resolved and the authority of the Minister to whom the UT reports has been extended.
Insurance Law No. 5684 goes a long way in streamlining the bureaucratic process for establishing and regulating insurance companies. Other than the controversy engendered by the rather unfortunate provision requiring an exhaustive and detailed list of excluded risks, the new Law appears to provide a much-needed reform. Presumably, the subject of excluded risks will soon be revisited by the legislators. Albeit somewhat "beneficiary-friendly," the law closely follows the dictates of the EU formula, and is strong evidence of Turkey's sincere intention to conform with EU doctrine.
1. The Association is a vocational institution in which all insurance and reinsurance companies should become a member within one month from obtaining the operation license.
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