As part of the government's agenda to make financial institutions more profitable, on April 26, 2016, amendments to the Highway Traffic Law were enacted to help reduce insurer losses from motor vehicle third-party insurance ("MTPL Insurance") products through standardized compensation calculations, permitting insurer costs to be more accurately projected. Additionally, injured parties must now apply to their insurer before initiating litigation or insurance arbitration; this is expected to decrease insurer litigation costs. As highlighted in our previous client alert, MTPL Insurance generates significant losses for non‑life insurers operating in Turkey, amounting to TRY 2.3 billion (~USD 0.8 billion) as of year-end 2015 and a total of TRY 7 billion (~USD 2.4 billion) in the last decade.
What the law says
The preamble of the law states that the new rules for MTPL Insurance are enacted to clarify MTPL Insurance product coverage and align coverage with market conditions and actuarial principles. The Highway Traffic Law and recently amended MTPL Insurance General Conditions will primarily govern MTPL insurance products and claims. To this end:
- Injured parties are now only permitted to file claims with the insurer; previously injured parties were allowed to file claims directly with a court. No claim can be brought before insurance arbitration tribunals or courts until after it has been submitted to the insurer, where (i) the insurer does not respond to the claim in writing within 15 days following the injured party's claim, or (ii) the insurer's payment is insufficient to cover the injured party's claim, resulting in a disputed claim. This is expected to decrease the number of court cases which will decrease the courts' involvement and the lengthy insurance claim process.
- A new standardized method will be adopted for the calculation of compensation. The Treasury will implement a method that considers the person's age, occupation, and their dependents, eliminating courts' reliance on expert witness damage approximations that have resulted in up to a 40% increase in insurance claims. This will decrease (i) insurers' statutory provisioning, and (ii) the cost of MTPL insurance premiums paid by insureds.
- The Highway Traffic Law and MTPL Insurance General Conditions will take precedence over the tort-related provisions of the Turkish Code of Obligations in the calculation of compensation. Previously, no clear hierarchy was established between the Highway Traffic Law and Turkish Code of Obligations, resulting in inconsistent interpretation by courts.
- The exemptions to MTPL Insurance coverage are now clearly defined to include claims arising from the fault of drivers (reversing a previous high court precedent from 2011 that allowed claim payments to the heirs of a deceased driver at fault).
MTPL insurance reform is intended to decrease the significant losses incurred by insurers in Turkey over the last ten years, while lowering the MTPL insurance premiums for consumers. Insurers' ability to accurately project the costs relating to MTPL insurance products through harmonization and clarification of the applicable rules will be the main driving force to control MTPL premiums. Another purpose is to speed up MTPL insurance claim cases before courts by requiring that claims be first submitted to insurers. Opponents of the changes have questioned their constitutionality, arguing that the changes restrict the right of the claimants to litigate and override the general principles of the Turkish Code of Obligations. The validity of these objections is not clear. In the meantime, it is expected that the reforms will effectively address a chronic problem in the third party motor vehicle insurance industry.