i Nature of the insurance and reinsurance market
There are 63 active insurance companies incorporated in Turkey, consisting of 38 non-life insurers, 17 life and pension insurers, five life insurers and three reinsurers.2
The premiums collected in 2020 (as at November) amounted to approximately 72.7 billion Turkish lira, an increase of 20.1 per cent compared with the previous year.3 Of this aggregate value, approximately 59.4 billion lira was derived from non-life insurers, whereas approximately 13.3 billion lira was derived from life insurers.4
Insurance sales in Turkey are conducted via direct sales, agencies, bancassurance and brokers. Agencies have the biggest share.
Agency sales are followed by bancassurance sales. Banks function as agents, bringing together insurers and clients demanding simple and low-cost products from trusted financial institutions. Bancassurance, just like other distribution channels, comes under close scrutiny from the Ministry of Treasury and Finance.
As there are only three Turkish companies active in the reinsurance market, reinsurance cover is mostly provided to Turkish insurance companies by foreign reinsurers.
Turk Re, one of the three local reinsurance companies, was established on 6 September 2019 with capital of 600 million lira and the Ministry of Treasury and Finance as the sole shareholder. In September 2020, Turk Re stated that the premiums held domestically over the past six months totalled 597 million lira.
In recent years, foreign investors' interest has grown significantly thanks to efforts to comply with the European Union regulations and the considerable insurance potential in Turkey. The foreign share in the insurance sector at the end of 2018 totalled 63 per cent of active insurance companies.5 The ratio of premiums to gross domestic product (GDP) in Turkey, however, is still low, demonstrating potential for growth:6 the volume of gross premiums has increased by 18.4 per cent since 2012 but constitutes only 1.5 per cent of GDP.7
The Turkish government has an objective to be the 10th largest economy in the world by 2023, aiming to generate US$2 trillion worth of gross national product.8 Structural reforms and initiatives such as the promotion of a personal pension scheme are expected to foster development of the market. However, despite growing awareness of insurance, there is a significant lack of legal and practical experience, particularly with respect to various types of complex policies, such as all risks construction and engineering policies.
ii The legal landscape for insurance and reinsurance disputes
Enforcement through the Turkish court system is a lengthy process. The vast majority of insurance disputes are handled by first instance commercial courts. In addition to other hurdles of Turkish litigation, lack of sufficient experience and specialisation coupled with the inadequacy of the legislative provisions of the old Commercial Code (replaced by the new Turkish Commercial Code (TCC) as of 1 July 2012) leads to a considerable level of uncertainty over the outcome of court proceedings.
Out-of-court settlements are therefore frequently used. Other than these arbitrary and voluntary settlement arrangements, there is also mandatory mediation prior to court litigation for commercial disputes, which was introduced by the legislature (see Section IV.vi for more information about mediation).
In 2007, a voluntary insurance arbitration system was introduced as an alternative to court proceedings. The total number of disputes settled by the Insurance Arbitration Commission was 398,516 as at 30 September 20209 and 426,531 as at 31 December 2020.10 The dramatic and constant increase in disputes settled this way in recent years clearly demonstrates that arbitration is becoming more popular.
i The insurance regulator
On 18 October 2019, the Insurance and Private Pension Regulation and Supervision Agency (IRSA) was established by Presidential Decree No. 47 and became the new insurance regulatory agency.
An insurance company in Turkey can only operate in the form of a joint-stock company or, in the case of mutual insurance funds, as a cooperative company. Before incorporation, insurance companies must obtain approval from IRSA. They must also apply to IRSA to be licensed in each insurance licence class.
An insurance company is not allowed to be active in both the life and non-life insurance divisions or in any sector not related to insurance.
The minimum paid share capital of an insurance company is 5 million lira, paid in cash.
A foreign insurance company can only operate in Turkey by opening a branch, by incorporation of a company in Turkey or by acquisition of shares of a local insurance company. However, according to Undersecretariat of Treasury Circular No. 2007/5, IRSA does not consider an 'operation' to be conducted in Turkey if the foreign reinsurance company merely receives, and accepts, a proposal from a local insured or broker to underwrite a risk in Turkey – without the foreign company engaging in any marketing activities in Turkey.
Insurable interests of residents in Turkey must be insured by insurance companies established in Turkey with a limited number of exceptions, such as the import and export of freight, ship chartering and life insurance. Therefore, fronting arrangements are frequently made between foreign and local insurance companies, especially for facultative insurance for big projects with high-risk capacity.
There are a considerable number of areas of compulsory insurance in Turkey, particularly for hazardous activities. The most widespread type of compulsory insurance is cover for motor vehicles.
Various activities, including transactions related to the commencement of operations, voluntary windings-up or mergers and acquisitions, acquisitions of other companies and their assets and liabilities, and the transfer of insurance portfolios are all subject to authorisation by IRSA.
Insurance company transactions remain exempt from value added tax but are subject to a banking and insurance transaction tax (BSMV) and fire insurance tax. Except for the specific exemptions, the general rate of BSMV is determined as 5 per cent of the insurance companies' transactions and the fire insurance tax, levied at 10 per cent, applies to insurance premiums collected on fire insurance purchased for movable and immovable properties within municipal boundaries and adjacent areas.
Insurance and reinsurance law
i Sources of law
Turkey's adopted legal system is one of continental law and legislation is the principle and primary source of law. The provisions of the Turkish Code of Obligations are applicable to insurance contracts where the insurance chapter of the TCC is silent.
Although court decisions are in principle not binding, in giving their judgments, local courts tend to rely heavily on the judgments of the Supreme Court of Appeal. However, established and consistent case law is lacking with regard to analysis and interpretation of insurance terms and conditions in most disputes, especially if the dispute requires technical or engineering expertise, because such disputes are mostly resolved by means of out-of-court settlements.
Turkish law does not explicitly contemplate reinsurance contracts. The only and main provision that particularly concerns reinsurance agreements is included in the TCC. Accordingly, insurance companies may reinsure the risk on whatever terms and conditions are deemed fit and necessary.11 Despite the wording of this particular provision and the fact that there is no other provision that directly concerns reinsurance agreements, many academics take the view that reinsurance agreements are ultimately subject to the mandatory pro-insured provisions governing insurance agreements. Therefore, in addition to the general rules of contract law, insurance law provisions in the TCC would, to the extent possible, apply to reinsurance relations by analogy. However, it is not clear to what extent and how provisions of insurance law in each case would apply to reinsurance.
The Insurance Act and subsidiary legislation provide the regulatory framework for the insurance and reinsurance industry.
ii Making the contract
The insurer must issue an insurance policy, recording the mutual rights, obligations (including default and special provisions) and general conditions predetermined by IRSA and signed by the insurer. Written form is not a condition for validity but a regulatory requirement, as a tool for evidencing the content and scope of the coverage, for the protection of the insured.
In this respect, the Insurance Act requires insurance contracts to be drafted in Turkish and devoid of any words in a foreign language. Similarly, the Law on Compulsory Usage of Turkish Language among Commercial Entities (Law No. 805)12 also requires all private law contracts to be drafted in Turkish. Scholars suggest that the provision in the Insurance Act stipulating the form of the policies should not apply to policies concluded abroad. However, they are concerned that Law No. 805, which is an imperative piece of Turkish law by reason of its particular purpose of public order, is applicable regardless of the designated law and place of execution. The courts, according to recent precedents, apply this requirement for contracts concluded with entities established under the laws of foreign states. There is no concrete consequence of violation of this requirement; however, use of foreign language, depending on the circumstances, may cause exclusions incorporated into the contract or insurance policy to be deemed void or interpreted to the detriment of the insurer.
The following can be identified as the main elements of insurance to be taken into account when drafting the contract or insurance policy, apart from formal requirements.
The Code refers to an 'interest measurable in monetary terms'. According to established doctrinal views and practice, an insurable interest in indemnity insurance consists of proprietary, intellectual or personal rights and receivables that are measurable in monetary terms and capable of enforcement by legal action.
With respect to life insurance, the TCC provides that the policyholder can take out insurance on the policyholder's own life or on the life of another person (the person subject to the risk) against death or survival. In the case of insurance on the life on another person, it is required that the beneficiary has an interest in the survival of that person.
Lack of insurable interest, not only at the time of the conclusion of the contract, but also at any stage, will result in invalidity of the contract. Provisions to the contrary will render the insurance contract invalid.
Depending on the type of insurance contract, the risk is transferred to the insurer as soon as the premium is paid or the contract concluded.
The insurer's obligation to indemnify is subject to the occurrence of the identified risk and the occurrence of a loss as a result of the occurrence of the risk. However, if the risk occurs because of intentional acts of the insured, the insurer shall be released from liability and shall not reimburse the premiums paid.
The insurance sum is subject to the limit of the insured value and the actual loss in indemnity insurance. The TCC forbids agreeing on an insurance sum exceeding the value of the insurable interest.
The TCC provides that 'unless otherwise contracted, liability of the insurer starts at the time of actual payment of the premium or the first instalment'.
Compliance with the payment schedule is crucial for the insured to retain coverage because, subject to certain notification prerequisites, the TCC provides the insurer with the opportunity to avoid the insurance contract without any legal consequence if the insured or policyholder fails to pay the premium instalments.
iii Interpreting the contract
General principles concerning interpretation of contracts in civil law also apply to insurance contracts. When trying to establish the actual meaning of the wording, the definitions of the Turkish Language Association are considered. When ambiguity or contradictions exist in the wording, interpretation in favour of the insured prevails because the primary duty of providing proper wording is on the insurer. The principles of protection of the insured and keeping the insurance contract alive are dominant. One of the main points to be considered in the interpretation is the principle of balance between the risk carried by the insurer during the term of the contract, the premium collected and the interests.
Incorporation of terms
Each and every insurance contract should refer to a set of general conditions, which are approved by IRSA. Apart from the general conditions, it is possible to incorporate special provisions according to needs of the insured within the framework of the mandatory provisions under the TCC; however, insurers should ensure that there is no ambiguity when interpreting the contracts.
The Insurance Act provides that the insurer should not content itself with merely writing down the risk covered under the contract; it must also expressly mention the exclusions. If exclusions are not mentioned by the insurer, they shall be deemed to be part of the insurance coverage.
The insurer, when negotiating and concluding the insurance contract, is under a strict duty to enlighten the insured about the details of the coverage; in the absence of which, the insured is entitled to rescind the insurance contract owing to the undesired terms incorporated into the insurance policy within 14 business days.
Types of terms in insurance contracts
Special provisions of insurance contracts have to be drafted in accordance with the standard general terms approved by IRSA and the mandatory provisions of the TCC. Non-compliance with mandatory provisions may render the contract or the relevant contract provision invalid. There are various legal provisions that cannot be contracted out contrary to the interests of the policyholder, the insured or the beneficiary.
Warranties – conditions precedent
Sanctions attached to certain warranties or conditions precedent to cover do not necessarily give the terms the intended effect and may be caught by semi-mandatory or mandatory provisions of the TCC. Where a condition or warranty relates to the duties already provided for by the TCC, such as the duties of disclosure and notification before and during the contract (regarding any increase in the risk) and upon the occurrence of the insured-against event, then semi-mandatory provisions that cannot be amended contrary to the interests of the policyholder, the insured or the beneficiary with respect to such duties and sanctions are highly likely to be applicable.
iv Intermediaries and the role of the broker
Position of brokers
According to the definition of the Insurance Act, a broker is the person who acts independently and impartially to appoint the insurance companies for contracting insurance policies.
Pursuant to the Regulation on Insurance and Reinsurance Brokers (the Brokers Regulation) enacted in mid 2015, brokers must obtain a brokerage licence from IRSA.
How brokers operate in practice
There are various obligations and prohibitions set out for brokers in the Brokers Regulation. For instance, although brokers can conclude protocols with insurance and reinsurance companies, they are prohibited from engaging in any other business. Brokers are also prohibited from preparing insurance policies and similar documents.
Under the new Brokers Regulation, the requirements on equity capital and assets have also been amended. A legal entity broker's minimum capital is set at 250,000 lira and 50,000 lira for any additional type of insurance.
Agencies and contracting
Agencies operate on behalf of insurers, on the basis of a contractual relationship between them and the insurance company.
Agencies can be a real person or a legal entity. The headquarters of legal entity agencies should be located in Turkey. Legal entity agencies also need to be incorporated as joint-stock or limited liability companies, obtain approval from IRSA and be registered on the Agency Registry, indicating whether or not they are granted power to conclude contracts and collect premiums. The approval shall be then promulgated by the Turkish Union of Chambers and Commodity Exchanges.
In April 2013, insurance agencies were prohibited from engaging in business other than agency work in the insurance sector.
Duty of disclosure
One of the statutory duties of the policyholder is the duty of disclosure, which includes the duty not to misrepresent facts known or reasonably expected to be known to him or her before the conclusion of the contract.
The TCC imposes a duty of disclosure on the insured at three different stages, namely, before the conclusion of the contract, during the contract and at the time of occurrence of the risk.
Regarding the duty of disclosure before policy inception, the TCC provides that the policyholder is under a duty to disclose important facts that are, or should be, known to him or her. In cases of non-compliance with the duty of disclosure before policy inception, the TCC provides alternative rights for withdrawal of the policy or to request a change in the premium. Where such a request for a change has not been accepted within 10 days, the insurance will terminate automatically.
Where a breach of the duty of disclosure has been discovered after occurrence of the risk, a reduction of the insurance indemnity will be made according to the degree of negligence of the policyholder in failing to disclose, provided that the negligence has the potential to affect the occurrence of the risk or the amount of the indemnity.
Furthermore, the TCC provides for the duty of immediate notification of an increase of the risk during the term of the contract and provides that the insured and the policyholder must refrain from acts that would increase the amount of insurance indemnity by way of aggravating the risk or current conditions. Where the increase has been learned of subsequently, the policyholder must notify the insurer within 10 days of learning at the latest.
The insurer has the right to terminate the policy or request a premium difference within one month of becoming aware of the increase in the risk. Where the non-disclosure was wilful, the insurer will keep the paid premiums. If payment of the premium difference has not been accepted within 10 days, the policy will be deemed terminated.
Where the increase has been learned of after the occurrence of the risk, the insurance indemnity will be reduced according to the gravity of negligence in the failure to disclose, provided that the non-disclosure is of such gravity that it may affect the amount of the insurance indemnity or the occurrence of the risk. Where the policyholder's non-disclosure was intentional, the insurer has the right to terminate the policy.
The policyholder also has a duty of disclosure upon occurrence of the risk that relates to the disclosure of the facts affecting the occurrence of the loss.
Good faith and claims
In the event that a risk materialises or that materialisation of the risk becomes highly probable, the policyholder must, as long as circumstances permit, take measures to prevent the loss or the increase in its likelihood, to mitigate the loss and to protect the insurer's rights of recourse against third persons.
Set-off and funding
The insurer is entitled to deduct the premiums due from the indemnity amount or the fixed sum to be paid with the exception of liability insurance.
i Choice of jurisdiction
The Turkish Civil Procedure Code, applicable to local disputes, restricts the freedom of choice of local jurisdictions to agreements between merchants and agreements between public legal entities. Insurance agreements with no 'foreign element' concluded with those who do not qualify as merchants shall therefore be subject to the jurisdiction rules provided for in the Civil Procedure Code and this cannot be altered contractually. Accordingly, the courts of the place where the insurable interest or risk is located are vested with jurisdiction, as an alternative to the courts of the respondent's domicile and the place of performance agreed under the contract.
The Code on International Civil Procedure, regulating conflict of laws, provides with respect to insurance contracts involving a foreign element that the following jurisdiction rules cannot be avoided by contract: (1) claims against insurers are subject to the jurisdiction of the courts at the insurer's principal place of business or the place of incorporation of the insurer's branch or Turkish-incorporated agent that concluded the contract; and (2) where the claim is against the policyholder, the insured or the beneficiary, the courts that have jurisdiction are the courts of its domicile in Turkey.
ii Choice of applicable law
The main limitation to the application of foreign law would generally be the absence of a foreign element and Turkish public policy. The general approach under Turkish law is that mandatory rules are not necessarily matters of public policy.
The requirement of the existence of a foreign element, however, is controversial. In a decision of the Supreme Court of Appeal in an insurance case filed by an insured, it was concluded that the choice of a foreign law between two Turkish parties would, in itself, suffice for fulfilment of the foreign element requirement even if there were no foreign element with respect to the dispute.
Claims to be pleaded directly towards the insurer
With regard to liability insurance, the TCC provides that third parties are entitled to direct their claims to the third-party liability insurer of the person responsible for the loss.
Notification before the pleading
The insured shall notify the loss that is thought to be within the insurance coverage as soon as possible. Maturity of the indemnity payment arises upon conclusion of the insurer's investigations into the scope of the indemnity and, in any case, 45 days after notification of the occurrence of the risk. The investigation of the insurer must be concluded within three months of notification.
Stages of litigation
Insurance disputes are, in principle, dealt with by the first instance commercial courts.
The stages of litigation before the commercial courts are as follows:
- The parties make a written submission of their claim, defence, rebuttal and rejoinder, and evidence.
- A preliminary hearing date is set, where issues such as case conditions and preliminary objections are to be resolved.
- Hearings are held on the disputed elements of the case, where the court can hear witnesses and obtain expert reports.
- Upon assessment of all evidence and facts, the court delivers a short judgment followed by a reasoned judgment.
- According to the Turkish Civil Procedural Code, the appeal procedure is to be conducted by a two-tier system comprised of regional appellate courts13and the Supreme Court.14
The Ministry of Justice has set target lengths for judicial proceedings for the first instance courts. The target for each individual proceeding was made available to parties on 1 January 2019. Mediation has been introduced as a compulsory remedy to be pursued before filing a lawsuit in commercial matters, to decrease the workload of the judicial bodies (see Section IV.vi).
This is also to enable the Supreme Court to evaluate the merited issues of a dispute and prepare more diligent reasoning for its awards, which, hopefully, may develop case law where legislation or practice is ambiguous. This is particularly important for insurance law, because the Supreme Court has not thus far provided guiding principles for complex insurance disputes, which often require considerable effort in interpreting facts and contracts to resolve a wide range of issues (e.g., deductibles, exclusions, subrogation).
Under Turkish civil law, the adversarial system prevails.
The burden of proof of the existence of the contractual relationship, the occurrence and amount of the loss lies with the insured. The insurer, on the other hand, must prove the lack of cover and application of exemptions. Every transaction exceeding 4,880 lira must be proven by a deed. Witness evidence would only constitute supportive evidence.
Turkish courts frequently refer disputes to a court-appointed panel of experts, even in legal matters. In a change to procedure, parties are now granted the opportunity to submit expert views, subject to questioning by the judge and the parties (without any common-law-style cross-examination procedure),15 as supportive evidence and without the need to obtain a judge's order in this regard.
Of the claimed amount, 6.831 per cent must be paid as court fees.16 One-quarter of this amount must be paid to the court in advance by the claimant. Court fees and court expenses (the most significant of which are expert fees – approximately 4,000 to 5,000 lira per expert examination) are recoverable in the event of the case being found in favour of the claimant. The court orders legal fees in favour of the winning party (or to the extent of acceptance by the court of the claimed amount) in accordance with an official tariff. The parties cannot recover actual fees they may have paid to their lawyers. Lawyers' fees ordered by the court belong to the lawyers unless agreed otherwise between the lawyers and their clients.
Claimants who are of foreign citizenship may also be obliged to submit a warranty to the court, the amount of which shall be determined by the court, subject to exemptions provided by bilateral and multilateral agreements (such as the Hague Convention on Civil Procedure).
Pursuant to Law No. 6570 dated 29 November 2014, the Istanbul Arbitration Centre17 was established and parties have the opportunity to refer disputes, in addition to ad hoc arbitrations and conventional arbitration institutions, to the Centre or to the Insurance Arbitration Commission, whose functions are explained below. The Centre presents an efficient alternative to court litigation, as the costs are low and the length of proceedings is short.
Parties can refer to arbitration for the resolution of insurance disputes by inserting an arbitration clause into the insurance and reinsurance agreement or concluding a separate arbitration agreement between themselves.
Insurance Arbitration Commission
The Insurance Act foresees an institutional arbitration proceeding irrespective of the existence of an arbitration clause. Proceedings before the Insurance Arbitration Commission lack certain elements of traditional arbitration as no arbitration agreement is concluded between the parties and the arbitrators are appointed by the Commission (rather than by the parties) from its list of registered arbitrators. This procedure is therefore regarded as a unique, ombudsman-like dispute resolution mechanism, instead of regular arbitration.
Most of the awards rendered by the Commission in 2020 concerned car insurance policies, compulsory traffic insurance and property insurance policies. Compared with court judgments, the awards contain more comprehensive examinations and reasoning.
A recent and binding decision on the unification of conflicting judgments ruled that as of 20 July 2016 decisions of the arbitration committee of the Insurance Arbitration Commission shall be directly subject to the highest appellate procedure, bypassing the appellate examination before the regional court of appeal, to ensure a more expeditious and cost-effective trial.
v Alternative dispute resolution
Complaints of the insured
If the insured has a complaint arising from interpretation of the regulations or conduct of an insurance company, it can apply to the Insurance General Directorate, incorporated under the Ministry of Treasury and Finance.
Mediation was recognised in Turkish law for the first time by the Mediation Act, which entered into force in June 2013. With the amendment of the TCC,18 which entered into force on 1 January 2019, mediation became a compulsory remedy to be pursued for all commercial claims (including insurance disputes) as a cause of action to be exhausted before proceedings are commenced, leaving filing a lawsuit before the state courts as a last resort.
In the event of a settlement following mediation, the parties may request an annotation regarding the execution of the agreement from the court at the place of jurisdiction. The annotation gives the agreement the power of a court judgment.
Year in review
Turk Re was established on 6 September 2019, with capital of 600 million lira and the Ministry of Treasury and Finance as its sole shareholder. In September 2020, Turk Re stated that the premiums held domestically over the past six months totalled 597 million lira.
Another element of the sector's transformation was the announcement in December 2019 by the Turkish Wealth Fund that the insurance and private pension companies controlled by public banks were being merged into one insurance company, Türkiye Sigorta, under the Fund. This newly established company began operating on September 2020.
In addition, trade credit insurance has been introduced for small and medium-sized enterprises (SMEs). This insurance covers any risk of non-payment of debts on sales that are not subject to any security instruments. SMEs with net annual sales of less than US$4.3 million will be eligible to benefit from this insurance.
Outlook and conclusions
According to the European Commission's Turkey 2020 Report, 'Turkey has a good level of preparation in the area of financial services', and it also notes that there has been some progress during the reporting period.19
The government has an objective to be the 10th largest economy in the world by 2023, aiming to generate US$2 trillion worth of gross national product. In line with this objective, the government is focusing on the insurance sector, among others.
Newly emerging risks, the country's past experience of disasters and the economic climate are important elements that contribute to shaping the legislation and insurance instruments underpinning the sector. In this context, in 2020, covid-19 became another significant factor, pushing both insurers and the insured to think outside the box and tailor policies to address parties' individual needs accurately.
With the prospect of a revival of the economy in 2021 and planned structural developments, the insurance sector is projected to take a bold step forward in the coming year.
First published by The Law Reviews, in 14.04.2021