Reinsurance & Reinsurance Investments By International Companies In Turkey

ADMD Law Office
Ali Yurtsever

I. OVERVIEW

The laws and regulations governing the insurance and reinsurance practices in Turkey are quite complex, since the principles and provisions governing the insurance and reinsurance practices are set forth at different laws, regulations and communique, including Turkish Commercial Code No.6102 dated January 13, 2011 (hereinafter referred as Law No.6102), Insurance Law No.5684 dated June 3, 2007 (hereinafter referred as Law No. 5684), Regulation Regarding Consideration of Capital Adequacy of Insurance, Reinsurance and Pension Companies published at Legislative Journal dated January 19, 2008 and No. 26761 (hereinafter referred as Regulation Regarding Capital Adequacy 2008) and the Regulation Regarding Consideration of Capital Adequacy of Insurance, Reinsurance and Pension Companies published at Legislative Journal dated August 23, 2015 and No. 29454 (hereinafter referred as Regulation Regarding Capital Adequacy 2015).

It should be noted that the laws in Turkey treat insurance and reinsurance companies separately and therefore, these companies are subject to different rules and regulations. Accordingly, while it will not be possible for a foreign insurance company to sell insurance policies to Turkish individual and/or entities for their insurable interests in Turkey (although there are certain exemptions to this rule), foreign reinsurance companies may provide reinsurance services to local insurance companies without establishing a legal presence in Turkey.

II. FORMATION OF INSURANCE AND REINSURANCE COMPANIES IN TURKEY

Article 2 subparagraph ‘I’ of the Law No. 5684 (Insurance Law) defines reinsurance companies as ‘reinsurance companies established in Turkey and branches of foreign reinsurance companies established in Turkey, whereas Article 3 subparagraph 1 of the Law No. 5684 sets forth that insurance companies that operate in Turkey shall be established either as a joint stock company or a cooperative and Article 3 subparagraph 5 of the Law No. 5684 sets forth that the procedures and principles for foreign insurance companies’ operations in Turkey shall be determined by the Council of Ministers.

Furthermore, according to Article 1 of the Council of Ministers Decree Regarding International Activities in the Insurance Sector No. 2007/12467 published at the Legislative Journal dated August 3, 2007 and No. 26602 (hereinafter referred to as Decree No. 2007/12467), foreign insurance and reinsurance companies may operate in Turkey by establishing a branch (if a local subsidiary of the non-resident company is established, the established subsidiary company is not deemed as a foreign company but rather a Turkish and Turkish resident company, hence the only way for a foreign non-resident insurance and reinsurance company to operate in Turkey is via a formation of a branch).

The above provisions may be construed as not permitting foreign insurance and reinsurance companies to provide insurance and/or reinsurance service to Turkish individuals and/or entities for their insurable interests in Turkey without first establishing a legal presence (either a subsidiary company or a branch). Therefore the same interpretation would prevent a foreign insurance or a foreign reinsurance company to sell insurance/reinsurance services/products to Turkish residents without first establishing a legal presence (either in the form of a branch or subsidiary company) in Turkey.

It should be noted at this point that such an interpretation will be correct for insurance companies as the law specifically states that insurance companies shall be established either as a joint stock company or cooperative or as a branch of a foreign insurance company. Furthermore, Article 15 of the Law No. 5684 sets forth that real persons and entities resident in Turkey may only obtain insurance policies for their insurable interests in Turkey and from insurance companies operating in Turkey. However, Article 15 subparagraph 2 of the Law No. 5684 sets forth certain exemptions, allowing certain insurable interests to be insured outside Turkey and from foreign insurance companies such as freight insurance, hull insurance, liability insurance arising from the operation of ships, life insurance and insurances for personal accidents, disease, health and motorized vehicles only for the duration for which the insured will be spending outside Turkey. Accordingly, it will not be possible for a foreign insurance company to provide insurance services/products (other than the exemptions set forth above) to Turkish residents (either real persons or entities) without first establishing a legal presence in Turkey.

However, the same does not apply to reinsurance companies as there are certain indirect provisions that allow foreign reinsurance companies to provide reinsurance services to local insurance companies for their re-insurable interests within Turkey, without establishing a legal presence.

III. MANDATORY REINSURANCE REGIMES IN TURKEY

It should also be noted at this point that, previously Turkish Law did implement a mandatory reinsurance regime (such mandatory insurance regime dates back to the Law No. 1160 published at 1927), in which the insurance companies were in fact obliged to reinsure a specific portion of their liabilities to the Turkish Reinsurance Company ‘Milli Reasürans’ (hereinafter referred to as ‘MilliRe’).

However, such mandatory reinsurance regime has since been abandoned since such regime was deemed to be in violation of fair practice rules and unfair competition provisions. Hence, although MilliRe is still operational (and provides around 25% of reinsurance services in Turkey) it is no longer a monopoly within the market. Although the mandatory reinsurance regime was abolished, the current legislation does not contain any direct and specific provisions allowing the sale and purchase of reinsurance services provided by foreign reinsurance companies that have no legal presence in Turkey.

IV. SALE OF FOREGIN REINSURANCE SERVICES IN TURKEY

Although there are no direct and specific provisions permitting or preventing the sale and purchase of reinsurance services provided by foreign reinsurance companies that have no legal presence in Turkey, the legislation does contain certain indirect provisions that allow for such transactions.

In this respect, Article 8 subparagraph 3 of the Regulation Regarding Capital Adequacy 2008 sets forth that in determining the total reinsurance risk, the total reinsurance premiums shall be calculated as per the following coefficients; “0,03 for risks transferred to reinsurance companies rated with the minimum acceptable rating, by rating companies to be determined by the Undersecretariat of Treasury, 0 for risks transferred to pools established in Turkey, and 0,12 for risks transferred to other reinsurance companies”.

However, this Regulation Regarding the Capital Adequacy 2008 is abolished by the Regulation Regarding Capital Adequacy 2015 published at the Legislative Journal dated August 23, 2015 and No. 29454. According to the new version of Article 8 sets forth that in determining the total reinsurance risk, the total reinsurance premiums shall be calculated as per the following coefficients; “0 for risks transferred to pools established in Turkey, 0,03 for risks transferred to reinsurance companies licensed in Turkey, 0,06 for risks transferred to reinsurance companies that are included at the list to be drafted by the Undersecretariat of Treasury as per financial and technical sufficiency criteria, and 0,12 for risks transferred to other reinsurance companies not included at the list”.

This new version of Article 8 does not contain any reference to a rating system (as implemented at the Regulation Regarding Capital Adequacy 2008) but rather implements a new system whereby the relevant reinsurance companies will be determined within a list to be drafted and published by the Undersecretariat of Treasury (containing a Directorate of Insurance within its organization structure). However, according to Article 12 of the Regulation Regarding the Capital Adequacy 2015, this regulation will enter into force as of the date of its publishing (at the Legislative Journal) that is August 23, 2015, whereas Article 11 of the regulation further states that the with the implementation and publishing of this regulation, the Regulation Regarding the Capital Adequacy 2008 will be abolished, except for Article 8 subparagraph 3 of the Regulation Regarding the Capital Adequacy 2008, which will be abolished only after January 1, 2016. Consequently the Article 8 subparagraph 3 of the Regulation Regarding the Capital Adequacy 2015 has entered into force on January 1, 2016. Therefore, the rating system and the coefficients set forth by Article 8 Subparagraph 3 of the Regulation Regarding the Capital Adequacy 2008 was still in effect until January 1, 2016.

In this respect, companies shall be subject to the previous Article 8 Subparagraph 3 of the Regulation Regarding the Capital Adequacy 2008 provisions for the breakdowns of the incurred reinsurance risk until December 31, 2015 (which will be submitted on February 28, 2016 at the latest). However, for the reinsurance risks to be incurred during the first half of the year 2016 (up until June 30, 2016) the new system imposed with the new Article 8 Subparagraph 3 of the Regulation Regarding the Capital Adequacy 2015 shall be applicable. Accordingly, it is expected that the list to be drafted by the Undersecretariat of Treasury as per Article 8 subparagraph 3 of the Regulation Regarding the Capital Adequacy 2015 to be published before June 2016.

In light of the above, it is possible for foreign reinsurance companies to sell reinsurance services/products to insurance companies in Turkey without establishing a legal presence (such as a company or a branch) in Turkey, since Article 8 subparagraph 3 of the Regulation Regarding the Capital Adequacy sets forth separate coefficients for risks that may be transferred to reinsurance companies licensed in Turkey and for other companies.

V. REVIEW OF THE TREASURY

Although there are no regulatory requirements and/or obligations set forth in the relevant legislation for foreign reinsurance companies conducting reinsurance activities in Turkey without a legal presence, the Treasury may impose certain requirements on insurance companies with respect to their dealings with reinsurance agreements. Accordingly, the Treasury may at its own discretion (and without relying on any legal provisions, laws, regulations etc.), request from the local insurance companies to submit certain types of reinsurance agreements that they execute with non-resident reinsurance companies (if any) for review.

The Treasury usually bases such requests on Article 8 subparagraph 3 of the Regulation Regarding Capital Adequacy 2008, which sets forth the coefficients for the calculation of total reinsurance premiums. In this respect, the Treasury generally requests the submission of reinsurance agreements claiming that they need to review and verify whether or not the relevant reinsurance companies comply with the with the minimum acceptable international rating standards as noted at Article 8 subparagraph 3 of the Regulation Regarding Capital Adequacy 2008.

VI. CONCLUSION

As noted above, although there is a mandatory insurance regime in Turkey that restricts foreign insurance companies to sell insurance policies to Turkish residents for their insurable interests in Turkey without establishing a legal presence, the same does not apply to foreign reinsurance companies, as there is no mandatory reinsurance regime in place. Hence, foreign reinsurance companies may sell reinsurance policies/services to local insurance companies directly from abroad and without establishing either a subsidiary company or a branch.