Significant sector-related changes in Turkey in 2021
With the Insurance and Private Pension Regulation and Supervision Agency ("Agency") fully operational, there have been far-reaching regulatory changes in Turkey over the past twelve (12) months.
A notable development in the Turkish insurance industry was the establishment of Türkiye Sigorta Anonim Şirketi through the merger of six (6) state-owned insurance companies. These insurance companies, previously controlled by the Central Bank of the Republic of Turkey, merged, with the main shareholder being the Turkish Wealth Fund, holding 81.1% of the shares.
An important regulatory change was the amendment of the Insurance Law No. 5684 in May 2021 establishing the “Special Risks Management Center” (“Center”) with its own legal personality to cover the risks for which there is no coverage or for which it is difficult to find a coverage as well as to carry out insurance or reinsurance pools and similar mechanisms for such risks. The Center also creates the possibility of establishing cooperation with other specialized institutions to support reinsurance, thus keeping part of the reinsurance premiums within the country. The same amendment also changed the Law on the Individual Pension Savings and Investment Scheme, allowing persons under the age of 18 to participate in the private pension scheme.
Moreover, in line with the Turkish Constitutional Court's decision on the Highway Traffic Law No. 2918 in October 2020, the provisions of the Highway Traffic Law No. 2918 regarding the compensation calculation principles in “Compulsory Traffic Insurance” have been updated to keep premiums at a reasonable level and to ensure predictability and stability of compensation payments.
In addition, at the end of 2020, the Agency published the "Regulation on Insurance and Private Pension Activities under the Participation Principles" to set out the general and specific principles for implementation in participation insurance.
Furthermore, the "Regulation on Internal Systems in the Insurance and Private Pension Sector", whose provisions aim to strengthen the structures of the sector's institutions and update the sector's practices in line with the international system, was published by the Agency on 25 November 2021.
The agency has also issued several circulars on various topics such as minimum capital amounts and profit distribution by insurance companies.
Regulatory changes forecast for the insurance sector in Turkey over 2022
Given emerging risks (e.g. climate change), increasing digitalization and the economic climate in 2021, the insurance sector is likely to see significant regulatory changes in the coming years. For example, the Agency plans to introduce a digital policy application that will allow customers to securely sign, store and access all documents in a digital environment, increasing the speed of transactions and reducing operating costs for insurance companies.
The Agency also aims to develop integrated systems that will pave the way for integrating various insurance products with the private pension system in the future to offer products in packages.
The Agency is also working on integrated compulsory insurance for natural disasters by including other types of natural disasters, in particular floods, in compulsory earthquake insurance.
Although it is a general point, the revision of the provisions of the Turkish Commercial Code related to the insurance chapter is being discussed among academics and market participants in order to find solutions to numerous problems encountered during implementation.
The Regulation of Online Insurers and InsurTechs
Online-only insurers and InsurTechs are expected to remain a hot topic for insurers to increase market penetration and improve underwriting practices for artificial intelligence, risk assessment and claims management.
In line with the increasing trend, the “Regulation on Activities to be Evaluated the Scope of Insurance and Distant Insurance Contracts” was published in June 2021 and a Circular on the same subject was published by the Agency in August. Both regulations provide for minimum conditions to be complied with for insurance contracts concluded through the website or mobile applications. Accordingly, insurers are responsible for ensuring the security of the website and mobile applications, providing customers with the required information, limiting customers' requests for information, ensuring continuous access to the policy and informing the Turkish Union of Chambers and Commodity Exchanges (TOBB) of the list of agencies that will conclude a contract in this way. In addition, it is stipulated that insurance companies are not allowed to sell insurance in electronic trading environments (e.g. social media), except on their own websites and mobile applications.
Another trend in the digital space is that, as mentioned earlier, the agency plans to introduce digital policy rules to allow access to insurance products through online platforms.
How will the regulation of reinsurers in Turkey develop over the next few years?
The main regulations on reinsurers are the Insurance Law No. 5684 and the Section Six of the Turkish Commercial Code N. 6102. There are also regulations on the rules of procedure of reinsurance company, as well as regulations on measurement and evaluation of capital adequacy of reinsurance companies. One of the milestones in the sector is the establishment of the Türk Reasürans Anonim Şirketi (“Türk Reasürans”) by the Law No. 7161. The aim of the establishment of Türk Reasürans is to increase domestic reinsurance capacity, and to provide reinsurance guarantee regarding the various risks for which providing guarantee is difficult throughout the country.
How do you see IFRS17 and capital adequacy requirements affecting the sector in Turkey?
The capital adequacy ratios are at a level that keeps insurance companies healthy. The ability of companies to distribute profits is not affected by capital adequacy requirements. Reinsurance companies are essential for the insurance sector as the logic behind it is the sharing of risks in a commercial sense. With the capital adequacy requirements, it shall be secured that reinsurance companies have no capital-related issues when financially supporting the insurance companies.
As far as IFRS 17 is concerned, the main alteration is in the accounting and reporting system. In the insurance sector, premium income has been recognized as income for many years. However, insurance income does not consist of the entire premium. Now, as accounting and reporting mechanisms change, financial statements of insurance companies will be comparable to those of companies in other sectors, such as bank balance sheets.
Regarding the impact of IFRS 17 on the sector in Turkey, with the new method, the periods for recognizing revenues and profits of the different companies are expected to coincide. Another impact could be that significant investment in infrastructure is required as this accounting is very comprehensive and complex.
2021 has been very dynamic for the insurance sector, especially regarding the regulatory changes and reflections of the public policies. However, there are still outstanding matters to solve and outcomes to observe. In any case, Turkey remains as an attraction point for insurance investments considering the endeavors towards further digitalization and institutionalization.