## cr1747 ## Source details **Canonical URL:** [cr1747](https://www.imf.org/-/media/files/publications/cr/2017/cr1747.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr1747.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr1747.pdf.json) --- ### EXECUTIVE SUMMARY — industry size, growth, and penetration - Sector share: less than 3 percent of all financial services sector assets in 2015. - Gross premiums written growth (2006–2015): average annual rate of approximately 22 percent (7.4 percent at constant prices). - Nominal GDP growth (2006–2015): 11.7 percent. - Insurance penetration (premiums written to GDP): increased from 1.26 percent in 2006 to 1.49 percent in 2014. - Employment: more than 58,000 people. - Market composition (2014/2015 context): - Non-life sector: more than 73 percent of premiums written. - Motor insurance: approximately 57 percent of non-life premiums written. - Property insurance: approximately 26 percent of non-life premiums written. - Construction and engineering insurance: approximately 6 percent of non-life premiums written. - All other non-life insurance: less than 11 percent of non-life premiums written. ### COMPARATIVE PENETRATION (2014 figures) - Turkey total: 1.49 percent, Per Capita 153.00 - Life: 0.19, Per Capita 19.76 - Non-Life: 1.02, Per Capita 107.21 - Personal Accident and Health: 0.21, Per Capita 23.04 - Bulgaria total: 2.16 percent, Per Capita 167.97 - Greece total: 2.12 percent, Per Capita 454.30 - Iran total: 1.93 percent, Per Capita 100.86 - Romania total: 1.29 percent, Per Capita 112.51 - Source of table data: Axco Global Statistics/GDI/SwissRe; Romania figure is 2013. ### INSTITUTIONAL FRAMEWORK AND SUPERVISORY STRUCTURE - Regulation and supervision vested in the Undersecretary of the Treasury (UoT), divided between: - General Directorate of Insurance (GDI): development/drafting of legislation and regulations, off-site supervision, certain intervention and enforcement activities. - Insurance Supervision Board (ISB): supervision, particularly on-site supervision. - Shared information systems platform used by both organizations. - Staff complement: - Total GDI + ISB employees: 172. - ISB employees: 66. - GDI employees: 106. - Majority of ISB staff located in Istanbul; ISB head office in Ankara. GDI staff all in Ankara. - Operational model: ISB reports serious problems to GDI, which then assumes responsibility for dealing with the troubled institution. - Insurance Agencies Executive Committee exists under Insurance Law 5684 with less than ten staff. - All authorized insurance, reinsurance and pensions companies must be members of the Association of Insurance, Reinsurance, and Pension Companies of Turkey (TSB). TSB manages the Assurance Account. ### POLICYHOLDER PROTECTION AND SAFETY NETS - No general policyholder compensation scheme for insurer insolvency. - Assurance Account funds certain compulsory insurance claims (e.g., motor insurance and other compulsory third party liability insurances), funded from fees on the regulated industry. - Claims on the Assurance Account must be related to: - personal injuries where the insured cannot be identified; - personal injuries caused by parties without required insurance coverage at the date the risk occurred; - personal injuries and damages to property for which the insurer is obliged to pay but is unable due to withdrawal of license or bankruptcy; - personal injuries where the vehicle involved is stolen or involved in violent crime; - payments within Turkey made by the Turkish Motor Insurers’ Bureau relating to foreign insurants under the Green Card Insurance Program. ### PROGRESS SINCE 2011 — achievements - Government effort to improve regulation, supervision, and adherence to international standards. - Improvements include: - Increased efficiency of information reporting, insurer monitoring and supervision. - Strengthened solvency tests. - Improved reserving and investment practices. - Improved international cooperation and information exchange. - Improved AML/CFT requirements. - Improved management of fraud and market conduct requirements. - Improved licensing requirements for insurance brokers and agents. - Notable achievements: Insurance Monitoring System (IMS) and the Company Risk Assessment Methodology and Framework (SEUS). ### MAJOR REGULATORY AND SUPERVISORY CHALLENGES — summary recommendations - Clarify supervisory objectives: clarify that policyholder protection is the principal objective of insurance supervision. - Increase independence, governance and accountability of the supervisor; consider alternative delivery models (e.g., independent supervisory authority, joint securities/insurance supervisor). - Beneficial ownership and suitability: identify controlling beneficiaries and require ongoing suitability. - Corporate governance and internal controls: - Enforce higher and more specific requirements for insurer corporate governance and internal controls. - Specific standards for Board composition and duty of individual Board Directors. - Expand risk management and internal control function requirements. - Enterprise Risk Management (ERM), actuarial and audit: - Implement more specific ERM requirements (e.g., ORSA process) at entity and group levels. - Require actuaries to opine on adequacy of premium pricing policies. - Require external auditors to opine on adequacy of insurer’s risk management and internal control systems. - Supervisory organization and conduct supervision: - Consider integrating offsite, onsite and enforcement activities within a single supervisory organization. - Develop a risk-based approach to Conduct of Business supervision including market analysis, offsite/onsite monitoring and thematic review. - Preemptive action and enforcement: - Consider vesting decision-making authority with the insurance supervisor rather than the Minister. - Develop a formal “ladder of intervention” commensurate with this change. - Capital regime, solvency, and reserving: - Move towards Solvency II: introduce a risk based capital measure including a greater range of risks. - Strengthen reserving practices to include MOCE and cash flow discounting. - Establish a clear solvency control level below which an insurer will not be allowed to operate. - Intermediaries and consumer protection: - Improve oversight of intermediaries. - Consider expanding representation and mandate of the Insurance Agents Executive Committee; increase enforcement powers and resources. - Establish strong rules for intermediaries on compensation disclosure and conflicts of interest. - Require Boards to approve fair treatment of consumers policies and receive regular implementation reports. - Group-wide supervision, macroprudential framework, crisis management: - Continue developing group-wide supervision framework. - Initiate work on macroprudential framework and crisis management/contingency plans. ### SEQUENCING AND IMPLEMENTATION - Recommendations to be considered within a multi-year regulatory and supervisory transition plan (e.g., three to five years). - Plan should include regular consultation with industry and focus on increasing supervisory efficiency without unduly increasing administrative burden and cost. - Objective: increase consumer confidence and lay a strong foundation for sector future. --- ### PREMIUMS, PRODUCT MIX, AND MARKET STRUCTURE (2015 and related) - Personal Accident and Healthcare Insurance: account for close to 15 percent of premiums written. - Life insurers can only write personal accident and healthcare insurance if they do not engage in pensions business; most life insurers choose pensions business, so non-life insurers write approximately 80 percent of personal accident and healthcare premiums. - Life sector share: less than 13 percent of premiums written. - Life business composition: - Group term life products: approximately 73 percent of life business. - Individual permanent life/whole life: almost ten percent of premiums written. - Individual term life: approximately 9 percent of premiums written. - All other products: less than 10 percent of premiums written. - Table 2 — Premiums Written in 2015* (values preserved exactly) - Premium in TL mn: Life 3,761.41; Non-Life 22,697.98; Personal Accident and Healthcare 4,541.26; Total 31,000.65 - Premium in USD mn: Life 1,382.87; Non-Life 8,344.85; Personal Accident and Healthcare 1,669.58; Total 11,397.30 - % of total market: Life 12.13; Non-Life 73.22; Personal Accident and Healthcare 14.65; Total 100.00 - Source: Axco Global Statistics - *Preliminary Estimates ### MARKET PARTICIPANTS, CONCENTRATION AND DISTRIBUTION CHANNELS - Total authorized insurance companies in Q3 2015: 60 (36 non-life insurers, 19 life and pension companies, 4 pure life insurers, 1 locally established reinsurance company). - Most insurers are joint stock companies; two cooperative insurers. - Less than 2 percent of gross premiums written is written outside the country. - Separate entities required for life and non-life business. - Number of insurers: decreased from 63 in 2014; one greater than 59 in 2011. - Reinsurer: writes both non-life and life; life reinsurance is a small fraction; in 2014 approximately 25 percent of reinsurer’s business written outside Turkey. - Foreign branches operating in country: 2. - Foreign capital participation: at least 24 non-life insurers and 15 life insurers. - Ownership links: major European and American insurance groups; several insurers linked with banks; four Islamic banks have ownership linkages with insurers. - Consolidated supervision: three insurance and banking groups out of 14 are currently subject to consolidated supervision by the UoT, BRSA, and the CMB. - Market concentration: - Herfindahl-Hirschman Index: less than 900 for non-life and less than 1200 for life, indicating well diversified markets. - Largest market share of any participant: approximately 15 percent of gross premiums written. - Largest five non-life insurers: account for less than 58 percent of premiums written. - Largest five life insurers: account for less than 70 percent of life industry assets (including pension industry assets). - Markets are intensely competitive. - Distribution channels (2014 shares): - Licensed agents: approximately 67 percent of premiums written. - Insurance brokers: approximately 14 percent. - Bancassurance (primarily lending related life products): 12 percent. - Direct sales: 5 percent. - All other distribution methods: less than 2 percent. - Intermediaries (2015): more than 16,100 licensed insurance agents and 123 insurance brokers. - Trend since 2011: number of insurance agents declined by approximately 3 percent; number of brokers increased by almost 34 percent. ### COMPULSORY PRODUCTS AND INSURANCE POOLS - Listed compulsory insurance products include motor third party liability, professional liability for tour operators, earthquake insurance on private dwellings, medical malpractice insurance, several passenger and professional indemnity covers, and liability for companies handling hazardous materials (full list preserved in source). - Four significant insurance pools: - Turkish Catastrophe Insurance Pool: compulsory urban residential property earthquake insurance; seven-person board; Technical Operator: Eureko Sigorta A. S.; insurers act as agents and bear no underwriting risk; Government partial reinsurance possible if needed. - Green Card Pool: covers motor third party liability for Turkish residents abroad and claims in Turkey caused by foreign plated vehicles; all motor TP insurers required to be members; run by TMIB; premiums ceded to pool; members share profits/losses proportionally. - Federation of Afro-Asian Insurers and Reinsurers (FAIR) Pool: reinsurance/retrocession for fire, engineering, marine hull and cargo, certain accident insurance; run by Milli Reinsurance S.A.; voluntary cessions and retrocession to members proportionally. - Agriculture Insurance Pool (TARSIM): standardized agricultural insurance; run by special purpose company set up by companies writing agricultural insurance; receives government subsidy minimum 50 percent of premiums; insurers issue policies in own name and transfer all risk and premium to Pool; insurers may retrocede and take a share. ### OPERATING PERFORMANCE AND PROFITABILITY - Life insurance and pension industry: - Premiums written growth: average annual rate of approximately 12 percent over last five years. - Underwriting results negative during that period; industry expense ratio increasing. - After tax return on equity ranged from 17.6 to 28.7 percent between 2011 and 2015. - Profitability largely from life business investment income rather than pension business. - Non-life sector: - Premiums written growth: average annual rate of more than 18 percent over last five years. - Industry expenses: in the 25 to 27 percent range. - Underwriting profits in 2013 and 2014 after several years of poor results. - Preliminary 2015 results suggest underwriting loss for non-life sector due to intense competition and reserve strengthening. - Reinsurance business: - Premiums appear to have declined from 2011–2012 levels; expense ratio increased. - Reinsurer had positive return on equity since 2012; underwriting losses in 2013 and 2014; relied on investment earnings and income from subsidiaries; appears likely to return to underwriting profitability in 2015. - Table 4 — Insurance Industry Return on Equity (%) (values preserved exactly) - 2011 | 2012 | 2013 | 2014 | 2015Q3 - Life: 17.56 | 19.38 | 20.36 | 28.05 | 28.67 - Non-Life: (0.37) | (15.10) | 14.34 | 12.49 | (1.23) - Reinsurance: (23.53) | 15.99 | 3.68 | 1.67 | 18.62 - Source: ISB and GDI ### ASSETS, LIABILITIES, AND INVESTMENT PROFILE - Asset growth (2011–2015): - Total sector assets grew by approximately 117 percent from 42,473 TL mn. to 92,080 TL mn.. - Life industry assets increased by close to 136 percent over same period. - Non-life assets grew by almost 94 percent between 2011 and 2015. - Growth drivers: expansion of pensions business (tax concessions and state contributions), premium growth, increased technical reserves holdings. - Investment profile: - Government securities (Treasury Bills and Government Bonds) account for approximately 75 percent of life insurer assets and 77 percent of non-life insurer assets. - Composition by major classes relatively constant over last five years. - Technical provisions have grown faster than total liabilities for life and non-life but not for reinsurance business. ### SOLVENCY POSITION AND SUPERVISORY ACTIONS - Solvency capital requirement: higher of two methods: - Solvency I style calculation (higher of premium income based or claims experience based calculation). - Risk based method considering asset, reinsurance, premium increase, outstanding claims reserve, underwriting and exchange rate risks valued against predetermined factors. - Table 6 — Solvency Assets Available Over Required (End-Period) (values preserved exactly; * First six months) - 2013 | 2014 | 2015* - Life — Available Capital Less Solvency Capital Requirement/Available Capital: 73.76% | 74.15% | 73.22% - Non-Life — Available Capital Less Solvency Capital Requirement/Available Capital: 20.01% | 26.69% | 11.57% - Reinsurance — Available capital Less Solvency Capital Requirement/Available Capital: 41.71% | 41.40% | 41.68% - Source: ISB and GDI - Intervention and failures: - Insurers subject to intervention: increased from nine in 2013 to 13 in 2014 due to capital increase requirements. - 2015 intervention figures not available. - Failures in last five years: three insurers (two non-life, one life). ### RISKS AND VULNERABILITIES - Macroeconomic and financial stability dependence: sector stability depends on Turkish economy and broader financial sector; geopolitical threats may impact outlook. - Competitive pressures: intense competition, price-based competition eroding underwriting discipline and creating solvency risks, especially for smaller insurers; liability lines exposed (e.g., MPTL). - Low interest rate and capital markets: low interest rates affect demand for life products; limited long-term instruments complicate ALM; UoT working on issuing long term bonds. - Natural disaster exposure: major earthquake zone; Turkish Catastrophic Insurance Pool mitigates urban residential catastrophic risk. - Currency and market volatility: vulnerability to investor sentiment; significant currency and financial market volatility since mid-2013 could impact industry via investment or claims cost. ### PRECONDITIONS FOR EFFECTIVE INSURANCE SUPERVISION - Macroeconomic context: - World Economic Forum competitiveness rank: 45th. - Positive factors: infrastructure quality, health and primary education, goods market efficiency, market size. - Top problematic factors: inefficient government bureaucracy, policy instability, lack of workforce education. - GDP and growth: - GDP: $719.97 billion (US) in 2015; Turkey was the world’s 17th largest economy in 2015. - Real GDP growth: close to 6% p.a. (2001–2008); contracted in 2009; 9.2 percent and 8.8 percent in 2011 and 2012; moderated to 4.2 percent in 2013 and 2.9 percent in 2014; real growth in 2015 expected in the 4 percent range. - Structural/legal context: - Per capita income: currently exceeding $10,600 (US) per person. - Move towards harmonization with EU laws; harmonization of prudential requirements with Solvency II being considered. - Legal system well developed but court access limited for individual consumers; high costs and long judgment times. - Insurance Arbitration Commission (IAC) established 2007 (Article 30 of Insurance Law No 5684): - Settles contract disputes between policyholders/beneficiaries and insurers; voluntary for insurers to join (compulsory product disputes may engage all insurers); deals with disputes without value limitation. - Decisions binding for cases up to TL 5,000; TL 5,000 and above may be appealed once within IAC within ten days; awards of TL 40,000 may be appealed to courts. --- ### ARBITRATION, ACCOUNTING, AUDITING AND ACTUARIAL STANDARDS - Arbitration: Articles 516 to 536 of the Code of Civil Procedure provide for arbitration; standard policy conditions often include arbitration provisions with binding decisions. - Mediation: Law No 6325 (2012) provides mediation for private law disputes including insurance; concept is new and relatively unproven in insurance. - Accounting/auditing: - Turkish Financial Reporting Standards essentially IFRS for insurance, reinsurance and pensions companies. - Independent auditors must be licensed with the Public Oversight, Accounting and Auditing Standards Authority; licensing requirements require training in insurance, IFRS, international auditing standards, corporate governance, risk management and internal controls. - Independent Auditors must use actuaries to review technical accounts and reserves. - Audit firm rotation: insurers can contract same audit firm up to seven years; audit staff may only work on audits of a single company for a maximum of five years. - Actuarial community: approximately 127 actuaries licensed with the UoT and an established actuarial professional association. ### SUMMARY OF OBSERVANCE WITH THE IAIS INSURANCE CORE PRINCIPLES (ICPs) - Overall observance summary (Table 7): - Observed (O): 3 - Largely Observed (LO): 15 - Partly Observed (PO): 8 - Not Observed (NO): 0 - Total: 26 - Key ICP assessments (high-level): - ICP 1 (Objectives): LO — objectives not fully consistent with two standards; recommendation to clarify primary legislation that principal objective is policyholder protection. - ICP 2 (Supervisor independence): LO — lack of clear separation of supervisory activities; major decisions rest with Minister; HR and budget under Government; appointment/dismissal processes not meeting ICP 2. - ICP 3 (Information exchange/confidentiality): O. - ICP 4 (Licensing): LO — legislative requirements sufficient but UoT lacks full data on natural person controlling beneficiaries. - ICP 5 (Suitability): LO — strengthen reporting when officers/directors no longer meet suitability; consider competency requirements for control functions. - ICP 6 (Changes in control/portfolio transfers): LO — controlling beneficiary not identified for all licensed insurers; portfolio transfers approved by Minister, not Supervisor. - ICP 7 (Corporate governance): PO — requirements should be strengthened and legally enforceable. - ICP 8 (Risk management/internal controls): PO — only internal audit and designated internal control staff currently required; actuarial and risk management functions need strengthening. - ICP 9 (Supervisory review/reporting): LO — IMS and SEUS significant; timeliness/efficiency concerns due to two UoT departments. - ICP 10 (Preventive/corrective measures): LO — authority to take timely preventive/corrective actions should be vested with Supervisor. - ICP 11 (Enforcement): LO — enforcement action powers largely with Minister. - ICP 12 (Winding-up/exit): PO — legislation does not specify mandatory cessation point; authority vested with Minister. - ICP 13 (Reinsurance and risk transfer): LO — no rules for prompt documentation of reinsurance transactions; no approval rules for Alternative Risk Transfer. - ICP 14 (Valuation): LO — no MOCE, no discounting of cash flows; earthquake/catastrophic reserving needs more sophistication. - ICP 15 (Investment): LO — more specific requirements for derivatives and a “prudent person” duty recommended. - ICP 16 (ERM for solvency): PO — more specific ERM/ORSA requirements needed. - ICP 17 (Capital adequacy): PO — standardized solvency approach, not total balance sheet; control levels generous and Minister has discretionary remediation powers. - ICP 18 (Intermediaries): PO — ongoing supervision of agents inadequate; no disclosure requirement for agent remuneration/conflicts. - ICP 19 (Conduct of business): LO — conflict of interest and complaints handling rules should be strengthened. - ICP 20 (Public disclosure): LO — capital adequacy, ERM/ALM and some governance information not required to be disclosed. - ICP 21 (Countering fraud): O. - ICP 22 (AML/CFT): O. - ICP 23 (Group-wide supervision): LO — framework not yet fully in place. - ICP 24 (Macroprudential surveillance): PO — extensive data collected but no formal macro-prudential framework integrated into supervision. - ICP 25 (Supervisory cooperation/coordination): LO. - ICP 26 (Cross-border cooperation/crisis management): PO — no crisis management plan/procedure manual; no requirement for insurer contingency plans. --- ### TABLE 8 EXCERPTS — RECOMMENDATIONS TO IMPROVE OBSERVANCE (selected) - High-level: clarify principal objective in primary legislation to emphasize policyholder protection. - ICP 2: explore options to improve independence, governance and accountability (standalone agency; attach to BRSA or CMB; “twin peaks” model). - ICP 4–6–5: improve identification of natural person controlling beneficiaries; require supervisor rather than Minister to approve portfolio transfers; strengthen suitability reporting obligations. - ICP 7–8: strengthen corporate governance, require four internal control functions, require actuaries to opine on pricing adequacy and external auditors to opine on risk management/internal controls. - ICP 9–11: integrate offsite/onsite/enforcement functions; empower supervisor to take timely preventive/corrective actions; publish a ladder of intervention. - ICP 14–17: transition towards Solvency II Pillar One, introduce MOCE and cash flow discounting, establish a clear solvency control level below which an insurer cannot operate. - ICP 18–19: strengthen intermediary supervision; require disclosure of remuneration/conflicts; Board approval and oversight of fair treatment policies; require separation of complaints handling. - ICP 23–26: develop group-wide supervision framework, macroprudential framework, crisis management plans and require insurer contingency plans. --- ### CAPITAL REQUIREMENTS, MINIMUM GUARANTEE FUND AND SOLVENCY CONTROL LEVELS (selected specifics) - Basic capital requirements (values preserved exactly as presented): - Non-life insurer writing all branches: TL 11.6 mn. - Non-life reinsurance company: TL 9 mn. - Life insurer or reinsurer basic capital: TL 5 mn. - Additional capital per class of life insurance business up to TRY 5.7 mn. for insurance companies writing all classes of life insurance and TL 3 mn. for reinsurance companies. - Maximum capital for a life insurer: TL 10.7 mn. - Maximum capital for a life reinsurance company: TL 8 mn. - Minimum Guarantee Fund: amount equal to one-third of the equity capital required for the insurer or reinsurer; for life insurance the guarantee defined in terms of mathematical reserves plus outstanding claims reserves less loans and mathematical reserves corresponding to premiums not yet collected. - Equity capital composition (Article 4 of the Regulation on the Measurement and Assessment of Capital Adequacy): - Core capital: paid-in capital, net profit for the period, and profit and capital reserves. - Supplementary capital: equalization provisions and quasi-equity loans. - Other capital items: a portion of subscribed capital. - Solvency margin and control levels: - Required capital is the higher of Solvency I Formula (Article 7) and Risk Based Capital Formula (Article 8). - Intended solvency ratio target: exceed 115 percent. - Solvency ratio between 100 and 115 percent: company must prepare a report explaining reasons and expectations. - Solvency ratio between 70 percent and 99 percent: plan required to close capital deficit within one year. - Solvency ratio between 33 percent and 69.99 percent: plan to increase capital to 70 percent within six months and to 100 percent within next one year. - Solvency ratio below 33 percent: Minister may take stronger actions including liquidation under Article 20 of the Insurance Law 5684 and the Regulation on Financial Structures. - Use of Internal Models: not currently permitted by UoT. - Assessment: Partly Observed. - Recommendation: continue transition towards Solvency II Pillar One and establish a clear solvency control level below which an insurer will not be allowed to operate. ### INTERMEDIARIES, CONDUCT OF BUSINESS, AND PUBLIC DISCLOSURE (selected) - Intermediaries licensing and requirements: - Agents: technical competency, pass UoT exam, minimum property/assets for individual agents: not less than 50,000 TL; corporate agencies minimum paid up capital: 300,000 TL for headquarters and 25,000 TL per branch. - Brokers: mandatory professional indemnity insurance; UoT advises liability limit at least 5 million TL; corporate broker minimum paid up capital: 250,000 TL plus additional amounts per class/branch. - Supervision: agents and brokers licensed and supervised by UoT and Union of Chambers of Commerce; agents’ supervision often complaint-driven; Insurance Agents Executive Committee handles disciplinary cases but lacks insurer or lay member representation. - Conduct of business: - Article 32 prohibits acts endangering insureds’ rights; Regulation requires systems for fair treatment of insureds but not explicitly Board-approved. - Standard policies used for compulsory products; UoT reviews policy documents for compliance. - Disclosure: Regulation on Furnishing Information in Insurance Contracts requires signed information forms in UoT-approved format at point of sale; failure to comply allows contract cancellation and damages claims. - Claims and complaints: insurers must maintain complaint handling units; complainants entitled to written response within 15 working days. - Privacy: Article 31/A prohibits disclosure of insured persons’ secrets; practice of agents stealing client lists appears prevalent. - Assessment of ICP 19: Largely Observed. - Recommendations: strengthen conflict of interest/disclosure rules, require Board-approved fair treatment policies and operational separation of complaint handling. - Public disclosure (ICP 20): Largely Observed; recommendations to expand disclosure to include solvency ratio, investment objectives/policies, ERM/ALM and market conduct information. ### COUNTERING FRAUD, AML/CFT, GROUP SUPERVISION, MACROPRUDENTIAL SURVEILLANCE, CRISIS MANAGEMENT - Fraud: - Criminal penalties under Turkish Criminal Code Articles 157 and 158; Regulation on Detection, Notification and Recording of Wrongful Insurance Practices; Fraud Bureau established in 2015; in 2015 opened more than 1200 files and referred 45 files (involving more than 1 million TL) for prosecution. - Assessment: Observed. - AML/CFT: - MASAK is AML/CFT authority; UoT assists MASAK with examiners/actuaries; ISB examiners involved; coordination meetings held; assessment: Observed. - Group-wide supervision: - Progress: 2010 Cooperation Protocol among financial regulators; joint supervision practices; UoT developing group supervision manual. - Assessment: Largely Observed. - Recommendation: develop detailed monitoring/supervision framework and allow group-wide supervisor (often BRSA) to determine scope. - Macroprudential surveillance: - UoT collects extensive data and produces sector reports but lacks formal macro-prudential framework and systematic stress testing program. - Assessment: Partly Observed. - Recommendation: develop systematic macroprudential framework integrated into supervisory program. - Crisis management and cross-border coordination: - UoT exchanges information and participates in supervisory colleges but lacks internal procedure manuals or insurer contingency plan requirements. - Assessment: Partly Observed. - Recommendations: develop internal contingency plan/manual; require insurers to establish contingency plans for going- and gone-concern situations. ### AUTHORITIES’ RESPONSE - UoT thanks FSAP team and notes commitment to continuous improvement. - UoT notes progress reflected in ICPs 2, 3, 13, 21, 22 and 25. - UoT believes it meets observance criteria for ICPs 8, 9, 12, 14, 19, 20 and 24 and requests further discussion on evaluation criteria. - UoT commits to refine regulatory and supervisory framework and increase compliance with ICPs taking assessors’ comments into consideration. *Source: IMF—cr1747 EXECUTIVE SUMMARY and staff summary excerpts provided in the supplied content.* ### EXECUTIVE SUMMARY __________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### Industry size, growth, and penetration - In 2015, the sector comprised less than 3 percent of all financial services sector assets. - From 2006 until 2015, gross premiums written grew at an average annual rate of approximately 22 percent (7.4 percent at constant prices). - Nominal GDP growth during the same period was 11.7 percent. - Insurance penetration (premiums written to GDP) increased from 1.26 percent in 2006 to 1.49 percent in 2014. - The sector employs more than 58,000 people. - Market composition (2014/2015 context): - The non-life sector accounts for more than 73 percent of premiums written. - Approximately 57 percent of non-life premiums written are for motor insurance. - Property insurance accounts for approximately 26 percent of non-life premiums written. - Construction and engineering insurance accounts for approximately 6 percent of non-life premiums written. - All other types of non-life insurance account for less than 11 percent of non-life premiums written. ### Comparative penetration (Table 1 figures for 2014) - Turkey total: 1.49 percent, Per Capita 153.00 - Life: 0.19, Per Capita 19.76 - Non-Life: 1.02, Per Capita 107.21 - Personal Accident and Health: 0.21, Per Capita 23.04 - Bulgaria total: 2.16 percent, Per Capita 167.97 - Greece total: 2.12 percent, Per Capita 454.30 - Iran total: 1.93 percent, Per Capita 100.86 - Romania total: 1.29 percent, Per Capita 112.51 - Source of table data: Axco Global Statistics/GDI/SwissRe; Romania figure is 2013. ### Institutional framework and supervisory structure - Regulation and supervision of insurance and pensions is vested in the Undersecretary of the Treasury (UoT) and is divided between two departments: - General Directorate of Insurance (GDI): development and drafting of legislation and regulations, off-site supervision, and certain intervention and enforcement activities. - Insurance Supervision Board (ISB): supervision, particularly on-site supervision. - Both organizations use offsite information received from a common information systems platform. - Staff complement: - Total GDI + ISB employees: 172. - ISB employees: 66. - GDI employees: 106. - Majority of ISB staff are located in Istanbul; ISB head office is in Ankara. GDI staff are all located in Ankara. - Under the existing operational model, when ISB identifies a serious problematic situation, it reports findings to GDI, which then assumes responsibility for dealing with the troubled institution. - An Insurance Agencies Executive Committee exists under Insurance Law 5684 with responsibilities including establishing professional rules for insurance agents, training activities, and disciplinary activities; it has a small staff of less than ten people. - All authorized insurance, reinsurance and pensions companies are required to become members of the Association of Insurance, Reinsurance, and Pension Companies of Turkey (TSB). The TSB manages the Assurance Account. ### Policyholder protection and safety nets - Turkey has no general policyholder compensation scheme for insurer insolvency. - The Assurance Account exists to pay certain compulsory insurance claims (e.g., motor insurance and other compulsory third party liability insurances), funded from fees on the regulated industry. Claims on the fund must be related to: - personal injuries where the insured cannot be identified, - personal injuries caused by parties without required insurance coverage at the date the risk occurred, - personal injuries and damages to property for which the insurer is obliged to pay but is unable due to withdrawal of license or bankruptcy, - personal injuries where the vehicle involved is stolen or involved in violent crime, - payments within Turkey made by the Turkish Motor Insurers’ Bureau relating to foreign insurants under the Green Card Insurance Program. ### Progress since 2011 and achievements - Significant effort by the Government of Turkey in the last five years to improve regulation and supervision and adherence to international standards. - Improvements cited: - Increased efficiency of information reporting, insurer monitoring and supervision. - Strengthened solvency tests. - Improved reserving and investment practices. - Improved international cooperation and information exchange. - Improved AML/CFT requirements. - Improved management of fraud and market conduct requirements. - Improved licensing requirements for insurance brokers and agents. - The Insurance Monitoring System (IMS) and the Company Risk Assessment Methodology and Framework (SEUS) are significant achievements. ### Major regulatory and supervisory challenges - Need to increase confidence in the sector and manage competitive market dynamics where many participants struggle to maintain or acquire market share. - Clarify the primary objectives of the supervisory authority: - At present, there are two major objectives in the primary insurance law. - The role of policyholder protection for the supervisory authority needs to be clarified as the principal objective of insurance supervision. - Independence, governance, and accountability deficiencies: - The supervisory authority does not meet international standards for operational independence. - Further work required to meet international standards regarding independence, governance, and accountability. - Under the existing supervisory model, these challenges will likely be difficult to achieve; consider alternative program delivery models with increased independence (such as an independent supervisory authority covering both securities and insurance). - Beneficial ownership and suitability: - Controlling beneficiaries of insurance companies need to be better mapped. - It is not clear that the UoT is aware of the ultimate controlling beneficiaries for all insurers. - They should be identified and required to meet ongoing suitability requirements. - Corporate governance and internal controls: - Supervisory authority should develop and enforce higher and more specific requirements for insurer corporate governance and internal controls. - At minimum, develop and implement more specific standards regarding the composition of insurer Boards and the duty of individual Board Directors. - Expand role and requirements for risk management and internal control functions. - Enterprise Risk Management (ERM) and actuarial/audit requirements: - Develop and implement more specific ERM requirements (e.g., ORSA requirements, and ERM process) on an individual entity and group basis. - Require actuaries to opine on the adequacy of premium pricing policies. - Require external auditors to opine on the adequacy of the insurer’s risk management and internal control systems. - Supervisory organization and conduct supervision: - Efficiency and timeliness of conducting monitoring and supervision through two disparate UoT departments is an ongoing concern. - Consider integrating offsite, onsite, and enforcement activities within a single supervisory organization. - Develop a more fulsome and risk based approach to Conduct of Business supervision including broader supervisory practices (e.g., market analysis, offsite and onsite monitoring and thematic review). - Preemptive action and enforcement: - Consider vesting decision making authority with the insurance supervisor rather than the Minister. - Consider developing a formal “ladder of intervention” commensurate with this change. - Capital regime, solvency, and reserving: - As part of plans to move towards Solvency II, introduce a risk based capital measure which includes a greater range of risks. - Strengthen reserving practices in line with international standards, particularly inclusion of a MOCE and cash flow discounting. - Establish a clear solvency control level as part of the capital regime below which an insurer will not be allowed to operate. - Intermediaries and consumer protection: - Ongoing oversight of insurance intermediaries should be improved. - Consider expanding representation on the Insurance Agents Executive Committee to include insurer, intermediary and lay member representation, broadening its mandate to cover all intermediaries, and increasing its enforcement powers and resources to discipline intermediaries. - Establish strong, clear rules for intermediaries regarding compensation disclosure and conflict of interest vis a vis insurance consumers. - Require insurer Boards to specifically approve policies relating to fair treatment of consumers and to receive regular reports on their implementation (particularly with respect to complaint handling). - Group-wide supervision, macroprudential framework, and crisis management: - Continue to develop the framework for group-wide supervision. - Initiate work to develop a macroprudential framework and crisis management and contingency plans (within the supervisory organization and in larger institutions). ### Sequencing and implementation - Recommendations should be considered within the context of a multi-year regulatory and supervisory transition plan for the sector (e.g., three to five years). - Such a plan should include regular and appropriate consultation with the industry and focus on increasing the efficiency of supervision without inordinately increasing administrative burden and cost. - Delivery of such a plan should help increase consumer confidence and trust in the sector and lay a strong foundation for its future. *Source: IMF—cr1747 EXECUTIVE SUMMARY* ### 30. Personal Accident and Healthcare Insurance account for close to 15 percent of ### 30. Personal Accident and Healthcare Insurance account for close to 15 percent of ### Premiums and product mix - Personal Accident and Healthcare Insurance account for close to 15 percent of premiums written. - This type of insurance may be written by both life and non-life insurers but life insurers can only participate in the market if they do not engage in pensions business. - Most life insurers choose to engage in pensions business rather than personal accident and healthcare insurance business and as a result, non-life insurers write approximately 80 percent of personal accident and healthcare premiums. - The life sector makes up less than 13 percent of premiums written. - Approximately 73 percent of life business is group term life products. - Individual permanent life/whole life accounts for almost ten percent of premiums written. - Individual term life accounts for approximately 9 percent of premiums written. - All other products account for less than 10 percent of premiums written. - Table 2 — Premiums Written in 2015* (values preserved exactly as presented) - Premium in TL mn: Life 3,761.41; Non-Life 22,697.98; Personal Accident and Healthcare 4,541.26; Total 31,000.65 - Premium in USD mn: Life 1,382.87; Non-Life 8,344.85; Personal Accident and Healthcare 1,669.58; Total 11,397.30 - % of total market: Life 12.13; Non-Life 73.22; Personal Accident and Healthcare 14.65; Total 100.00 - Source: Axco Global Statistics - *Preliminary Estimates ### Market participants and structure - Total authorized insurance companies operating in Turkey during the third quarter of 2015: 60. - Composition: 36 non-life insurers, 19 life and pension companies, 4 pure life insurers, and one locally established reinsurance company. - Most insurers are joint stock companies; there are two cooperative insurers. - Less than 2 percent of gross premiums written is written outside the country. - Separate entities are required for life and non-life business. - The number of insurers decreased from 63 in 2014 and is one greater than the 59 insurers in 2011. - The reinsurance company writes both non-life and life business but life reinsurance accounts for only a small fraction of its gross premiums written. - In 2014, approximately 25 percent of the reinsurer’s business was written outside of Turkey. - There are 2 foreign branches operating in the country. - International participation: - At least 24 non-life insurers and 15 life insurers have foreign capital participation. - Ownership links exist with major European and American insurance groups and several insurers have ownership linkages with banks. - Four Islamic banks have ownership linkages with insurers; interest in the market for Takaful products is expected to grow. - Three insurance and banking groups out of 14 are currently subject to consolidated supervision by the UoT, BRSA, and the CMB. ### Market concentration and competition - Herfindahl-Hirschman Index: less than 900 for the non-life industry and less than 1200 for the life industry, indicating well diversified markets. - Largest market share of any industry participant: approximately 15 percent of gross premiums written. - Largest five non-life insurers account for less than 58 percent of premiums written. - Largest five life insurers account for less than 70 percent of life industry assets (including pension industry assets). - Both life and non-life markets are described as intensely competitive. ### Distribution channels - Main distribution channels and 2014 shares: - Licensed agents: approximately 67 percent of premiums written in 2014. - Insurance brokers: approximately 14 percent of premiums written. - Bankassurance (primarily lending related life products): 12 percent of premiums written. - Direct sales: 5 percent of premiums written. - All other distribution methods: less than 2 percent of premiums written. - In 2015, there were more than 16,100 licensed insurance agents and 123 insurance brokers. - Since 2011, number of insurance agents declined by approximately 3 percent while number of brokers increased by almost 34 percent. ### Compulsory insurance products and insurance pools - Compliance with some compulsory products (e.g., earthquake insurance, and motor third party liability) is a significant issue. - Table 3 — Compulsory Insurance Products (listed exactly as in source) - Motor third party liability for bodily injury and property damage. - Professional liability cover for tour operators. - Earthquake insurance on private dwellings. - Medical malpractice insurance for doctors and dentists. - Third party liability for bodily injury and medical expenses for passengers on intercity and international transport. - Professional indemnity insurance for independent auditors - Third party liability for passengers on vessels registered to carry 12 or more passengers. - Sea pollution liability for companies situated near the shoreline - Personal accident cover for intercity coach passengers. - Public liability insurance for private security guards. - Personal accident cover for miners. - Third party legal liability and passenger liability for aircraft. - Professional indemnity insurance for companies providing professional services to banks. - Insurance of goods that are subject to finance leasing. - Liability of companies engaged in the production, storage, and handling of LPG cylinders. - Professional indemnity insurance for electronic signature certificate providers. - Liability insurance for companies engaged in the production, storage, transport, and sale of combustible, explosive or flammable materials. - Four significant insurance pools: - Turkish Catastrophe Insurance Pool: - Created after the 1999 earthquake to provide compulsory insurance for urban residential properties for property damages caused directly by earthquakes and other perils of fire, explosion, tsunami, or landslide following earthquake. - Administration: seven person board largely composed of officials from several government ministries. - Technical Operator at present: Eureko Sigorta A. S. - Insurance companies act as agents for the pool but bear none of the underwriting risk. - If unable to transfer risks to international reinsurance markets on favorable terms, Government can provide partial reinsurance coverage to the pool. - Green Card Pool: - Covers motor third party liability claims of Turkish residents travelling abroad in Europe and handles claims of accidents in Turkey caused by foreign plated vehicles with a valid green card. - All insurers licensed to write motor third party liability insurance in Turkey are required to be members. - Run by an independent board of managers with the Turkish Motor Insurance Bureau (TMIB). - Green cards are issued by local insurers and all premiums are ceded to the pool. - Claims handled by the TMIB; settlement follows the laws of the country where the accident occurred. - Members share profits or losses in proportion to volume of business ceded. - Federation of Afro-Asian Insurers and Reinsurers (FAIR) Pool: - Accepts reinsurance and retrocession business from African and Asian markets for fire, engineering, marine hull and cargo, and certain types of accident insurance. - Run by Milli Reinsurance S.A. - All cessions are voluntary and business is retroceded back to members in proportion to amount ceded. - Agriculture Insurance Pool (TARSIM): - Provides standardized agricultural insurance cover to farmers in Turkey. - Run by a special purpose company set up by companies writing agricultural insurance business. - Overseen by a Board comprising government and industry members and a member from the Union of Turkish Chambers of Agriculture. - Receives a government subsidy of a minimum 50 percent of the premiums written. - Insurance companies issue policies in their own name; all risk and premium must be transferred to the Pool. - These insurance companies can optionally take a share from the Pool through retrocession. ### Operating performance and profitability - Life insurance and pension industry: - Premiums written have grown at an average annual rate of approximately 12 percent over the last five years. - Underwriting results have been negative during that period and the industry expense ratio has been increasing. - After tax return on equity ranged from 17.6 to 28.7 percent between 2011 and 2015. - Profitability largely appears to be the result of life business investment income rather than pension business. - Non-life sector: - Premiums written have grown at an average annual rate of more than 18 percent over the last five years. - Industry expenses have been in the 25 to 27 percent range. - Underwriting profits in 2013 and 2014 after several years of poor results. - Preliminary 2015 results suggest the non-life sector will again incur an underwriting loss reflecting intense competition and reserves strengthening. - Reinsurance business: - Premiums written appear to have declined from levels in 2011 and 2012 and the expense ratio for the country’s only reinsurer has increased. - The reinsurer had a positive return on equity since 2012, suffered underwriting losses in 2013 and 2014, relying on investment earnings and income from subsidiaries to remain profitable. - It appears that it will return to underwriting profitability in 2015. - Table 4 — Insurance Industry Return on Equity (%) (values preserved exactly) - 2011 | 2012 | 2013 | 2014 | 2015Q3 - Life: 17.56 | 19.38 | 20.36 | 28.05 | 28.67 - Non-Life: (0.37) | (15.10) | 14.34 | 12.49 | (1.23) - Reinsurance: (23.53) | 15.99 | 3.68 | 1.67 | 18.62 - Source: ISB and GDI ### Assets, liabilities, and investment profile - Asset growth: - From 2011 to 2015, total sector assets grew by approximately 117 percent from 42,473 TL mn. to 92,080 TL mn.. - Life industry assets increased by close to 136 percent over the same period. - Non-life assets grew by almost 94 percent between 2011 and 2015. - Growth drivers: expansion of pensions business (stimulated by tax concessions and state contributions towards private pension plans) and general premium growth and increased holdings of technical reserves by insurers. - Investment profile: - Government securities (mainly Treasury Bills and Government Bonds) account for approximately 75 percent of life insurer assets and 77 percent of non-life insurer assets. - Composition of investments between major classes has been relatively constant over the last five years. - Technical provisions have grown faster than total liabilities for both life and non-life business but not for reinsurance business. ### Solvency position and supervisory actions - Solvency framework: - The solvency capital requirement is the higher of two methods: a Solvency I style calculation (higher of a premium income based calculation or a claims experience based calculation) or a risk based method that considers a range of risks valued against predetermined factors set out in regulation. - Table 6 — Solvency Assets Available Over Required (End-Period) (values preserved exactly; * First six months) - 2013 | 2014 | 2015* - Life — Available Capital Less Solvency Capital Requirement/Available Capital: 73.76% | 74.15% | 73.22% - Non-Life — Available Capital Less Solvency Capital Requirement/Available Capital: 20.01% | 26.69% | 11.57% - Reinsurance — Available capital Less Solvency Capital Requirement/Available Capital: 41.71% | 41.40% | 41.68% - Source: ISB and GDI - Intervention and failures: - Number of insurers subject to intervention increased from nine in 2013 to 13 in 2014 due to requirements to increase capital. - 2015 figures on intervention are not currently available. - Three insurers have failed in the last five years: two non-life companies and one life insurance company. ### Risks and vulnerabilities - Dependence on macroeconomic and financial stability: - Continued growth and stability of the insurance sector depends on continued growth and stability of the Turkish economy and the broader financial sector. - Mounting geopolitical threats in the region and in the southeast of the country could impact general financial and economic stability and the sector outlook. - Mitigation: effective consolidated supervision and stress testing; authorities are working to minimize potential impacts. - Competitive pressures: - The market is intensely competitive with a large number of insurers for the size of the market. - Fierce competition on price rather than quality is eroding underwriting discipline and could create solvency problems, particularly for smaller insurers. - Hard price competition is prevalent in liability lines (e.g. MPTL insurance) and has resulted in underwriting losses over recent years. - Further industry consolidation may help mitigate these pressures. - Low interest rate environment and capital markets: - Continued low interest rates may impact consumer demand for some new life insurance products though they stimulate demand for credit insurance associated with lending. - Limited availability of long term financial instruments makes asset liability matching difficult for insurance and pensions companies. - The UoT is working on issuing long term bonds to help mitigate the matching problem. - Improving growth and depth of capital markets and increasing access to insurance in underserved populations through tailored products may help increase demand for life insurance. - Natural disaster exposure: - The largest industrial and commercial area of Turkey is located in a major earthquake zone. - Establishment of the Turkish Catastrophic Insurance Pool was a significant step towards mitigating catastrophic risks related to urban residential structures. - Currency and market volatility: - Turkey has been vulnerable to changes in investor sentiment and, together with other emerging markets, has experienced significant currency and financial market volatility since mid-2013. - Renewed financial market volatility and investment or claims cost impacts due to unexpected declines in the value of the currency could impact the insurance industry. ### Preconditions for effective insurance supervision - Macroeconomic context: - Turkey was ranked 45th in global competitiveness by the World Economic Forum. - Positive factors: quality of overall infrastructure, health and primary education, goods market efficiency, and market size. - Top three problematic factors: inefficient government bureaucracy, policy instability, and a lack of workforce education. - GDP and growth context: - Gross Domestic Product (GDP) of $719.97 billion (US) in 2015; Turkey was the world’s 17th largest economy in 2015. - From 2001 until 2008 average real GDP growth close to 6% per annum. - GDP contracted in 2009, rebounded with real growth rates of 9.2 percent and 8.8 percent in 2011 and 2012 respectively. - Growth moderated after 2012: 4.2 percent in 2013 and 2.9 percent in 2014. - Real growth in 2015 is expected to have been in the 4 percent range. - Structural and legal context: - Turkey's economy increasingly driven by industry and services; agriculture still accounts for about 25% of employment. - Per capita income currently exceeding $10,600 (US) per person. - Turkey is moving towards harmonization of laws with EU laws; regulatory and supervisory authorities are looking at harmonizing major prudential requirements with the EU’s Solvency II requirements. - Turkey’s legal system is well developed but court system not easily accessible to individual insurance consumers; court costs and legal fees are high and judgments can take several years. - Insurance Arbitration Commission (IAC) established by Article 30 of the Insurance Law No 5684 in 2007: - Settles contract disputes between policyholders/beneficiaries and insurers. - Voluntary for insurance companies to join; for compulsory products all insurers can be engaged in arbitration even if not a member. - IAC deals with disputes associated with all types of insurance products without value limitation. - Cases entrusted to an expert approved by the IAC; decision binding on both parties for cases up to TL 5,000. - Disputes of TL 5,000 and above may be appealed once within the IAC system within ten days of decision notification. - Awards of TL 40,000 may be appealed to the courts system. *Source: IMF staff summary of material in cr1747 (2017) as provided in the supplied content.* ### 59. More generally, arbitration is provided for under Articles 516 to 536 of the Code of ### cr1747 - 59. More generally, arbitration is provided for under Articles 516 to 536 of the Code of ### Arbitration and Mediation - Arbitration - Arbitration is provided for under Articles 516 to 536 of the Code of Civil Procedure. - Standard policy conditions often contain an arbitration provision which, in the event of a dispute between the insurance company and the insured, may be used to determine quantum. - The parties to the dispute try to agree on an arbitrator but, if they cannot agree, each appoints its own arbitrator and they in turn nominate a third. - The decision of the arbitrator(s) is binding on both parties. - Mediation - In 2012, Law No 6325, the Law on Mediation in Civil Disputes, came into force. - The law is intended to provide for mediation services for resolution of private law disputes, including those involving insurance contracts. - The law is intended to help harmonize Turkish laws with EU legislation (EU Directive 2008/52/EC) but the concept of mediation is new in Turkey and relatively unproven in the area of insurance. ### Accounting, Auditing and Actuarial Standards - Turkish Financial Reporting Standards are essentially International Financial Reporting Standards (IFRS) for insurance, reinsurance and pensions companies. - Independent auditors for insurance companies must be licensed with the Public Oversight, Accounting and Auditing Standards Authority. - Licensing requirements appear to be rigorous and require auditors to have training in insurance business, IFRS, international auditing standards, corporate governance, risk management and internal controls. - Independent Auditors must use actuaries to review the technical accounts and reserves of companies. - Insurers can contract with the same audit firm for up to seven years but audit staff may only work on the audits of a single company for a maximum of five years. - Actuarial community - There are approximately 127 actuaries currently licensed with the UoT and there is also a well-established actuarial professional association. ### Summary of Observance with the ICPs — key findings by ICP (from Table 6) - ICP 1 - Objectives, Powers and Responsibilities of the Supervisor — LO - While the authority responsible for insurance supervision (UoT) is clearly defined in primary legislation, the objectives of insurance supervision are not fully consistent with two standards. - ICP 1.2 requires that the objectives be clearly set out in primary legislation (rather than regulations) and ICP 1.3 requires that the principal objectives promote the maintenance of a fair, safe and stable insurance sector for the benefit and protection of consumers. - ICP 2 - Supervisor — LO - There is no clear separation of insurance supervision activities from the many other roles carried out by the UoT. - Major decisions relating to intervention rest with the Minister rather than the supervisory authority. - The human resource and budget functions are ultimately under the control of the Government rather than the insurance supervisors. - The appointment and dismissal of the head of the supervisor does not meet the requirements of ICP 2. - These factors have serious implications for the independence, governance and accountability of the insurance supervisory function. - ICP 3 - Information Exchange and Confidentiality Requirements — O - The supervisor has the necessary legislative authority and demonstrates the ICP standards in its supervisory practice. - ICP 4 - Licensing — LO - Legislative requirements are sufficient to meet the requirements of the ICP, but The UoT does not have information on the natural person controlling beneficiary for all licensed insurers (see ICP 6). - This weakness impacts on the integrity of the licensing process. - ICP 5 - Suitability of Persons — LO - Regulatory requirements should be strengthened to ensure that insurers report when officers or directors no longer meet the suitability criteria established in the legislation to UoT. - Consideration should be given to developing more specific competency requirements for people in control functions (e.g risk management) after requirements for these functions are established. - UoT should ensure that all natural person controlling beneficiaries of insurance companies meet suitability requirements (see ICP 6). - ICP 6 - Changes in Control and Portfolio Transfers — LO - The controlling beneficiary of all licensed insurers is not presently identified. - ICP 6.10 requires that portfolio transfers be subject to approval by the Supervisor not the Minister. - The supervisor must satisfy itself that the interests of the policy holders of both the transferee and the transferor will be protected. - At present, the power to approve is a permissive power. The Minister may approve or not approve a transfer. There is no obligation that an approval be in the best interests of policy holders. - ICP 7 - Corporate Governance — PO - Corporate governance requirements for insurers should be strengthened and made more legally enforceable. - ICP 8 - Risk Management and Internal Controls — PO - The ICP requires insurers to have four effective internal control functions: compliance, actuarial, and risk management and internal audit. - At present, there is only a requirement for an internal audit and designated internal control staff. - Actuaries should be required to opine on the adequacy of premium pricing policies. - External auditors should be required to opine on the adequacy of the insurer’s risk management and internal control systems. - ICP 9 - Supervisory Review and Reporting — LO - UoT has made significant progress in developing its monitoring and supervisory framework for insurers. - Development of IMS and SEUS are significant achievements, but the efficiency and timeliness of monitoring and supervision through two disparate departments is an ongoing concern. - ICP 10 - Preventative and Corrective Measures — LO - The ICP requires the authority to take timely preventive and corrective actions be vested with the supervisor and not the Minister. - Consideration should be given to amending the Regulation On The Measurement And Assessment of Capital Adequacy to empower the supervisor to set the timeframe for insurers to improve their capital position. - Existing legislated timeframes for insurers who fall below 100 percent (one year) and 70 percent (1.5 years) to meet required capital levels appear to be excessive. - While UoT has power to require insurers to comply within a shorter time frame, the current timeframes set in the regulation set an expectation in industry that deficiencies in capital adequacy do not need to be remedied quickly. - ICP 11 - Enforcement — LO - The ICP requires the authority to take enforcement action be vested with the supervisor and not the Minister. - ICP 12 - Winding-up and Exit from the Market — PO - The legislation does not specify a point at which it is no longer permissible for an insurer to continue its business. - The authority to act is vested with the Minister rather than the supervisory authority. - ICP 13 - Reinsurance and Other Forms of Risk Transfer — LO - There do not appear to be rules for prompt documentation of reinsurance transactions though UoT monitors the practice through on-site examinations. - There are no rules or approval requirements for Alternative Risk Transfer arrangements. - ICP 14 - Valuation — LO - The current standards do not provide for the inclusion of MOCE or for discounting of cash flows. - A more sophisticated approach to earthquake/catastrophic reserving should be considered. - ICP 15 - Investment — LO - There should be more specific requirements established to ensure the appropriate use of derivatives (e.g. only for hedging purposes). - Legislation should be amended to establish a stronger duty of care for directors to act prudently and in the interests of policyholders (e.g. a “prudent person” definition for investment purposes). - ICP 16 - Enterprise Risk Management for Solvency Purposes — PO - In conjunction with strengthening governance and internal control requirements, more specific ERM requirements should be developed and implemented (e.g. ORSA, and ERM process) on an individual entity and group basis. - ICP 17 - Capital Adequacy — PO - The current solvency approach is a standardized approach but not a total balance sheet approach. - The Solvency I formula does not consider interdependence between assets, liabilities, regulatory capital requirements, and capital resources for determining the solvency requirements. - The risk based formula recognizes a greater range of risks but not all the major risks that are likely to affect the value of assets and liabilities (eg. operational risk). - The solvency control levels set a limit above which the supervisor does not intervene but do not clearly establish a minimum floor below which an insurer is regarded to be unviable. - Should the solvency control level fall below the minimum, the Minister has a range of options he/she may use to “remediate” the insurer rather than liquidate it should he or she choose to do so. - It is not clear that the existing regulatory capital requirements are calibrated so that in adversity an insurer’s obligations to policy holders will be fully met. - Current solvency control levels provide a very generous amount of time for insurers to correct solvency deficiencies. - It is the Minister, rather than the supervisor, who has the power to take stronger actions to strengthen the financial structure of the company, including the decision to liquidate it (see ICP 10), suggesting that the intervention process could be too slow to protect the interests of policy holders. - ICP 18 - Intermediaries — PO - The level of ongoing supervision related to agents conduct appears to be inadequate. - There is no requirement to disclose to customers the basis on which agents are remunerated by insurers or other potential conflicts. - The Code of Conduct for intermediaries, while a significant step forward, includes few specific conduct rules or examples of inappropriate conduct. - ICP 19 - Conduct of Business — LO - Conflict of interest/disclosure of compensation requirements for agents and intermediaries should be strengthened. - Board approval and reporting is not specifically required for insurer’s policies related to fair treatment of consumers. - There is no specific requirement that the complaint handling function of insurers be separate from the area of the organization that is subject of the complaint. - ICP 20 - Public Disclosure — LO - Some items described in the ICP, such as capital adequacy (solvency ratio), investment objectives and policies and ERM/ALM, are not required to be disclosed. - More information on governance and internal controls should be considered. - Consideration should be given to expanding information requirements to include company information on market conduct policies and risks (e.g. information on management of complaints). - ICP 21 - Countering Fraud in Insurance — O - Significant progress has been made since the last assessment in this area particularly with the establishment of the Fraud Bureau and data base. - ICP 22 - Anti-Money Laundering and Combating the Financing of Terrorism — O - While the UoT is not the AML /CFT authority, UoT staff are knowledgeable about AML/CFT issues and conduct on-sites on AML/CFT internal control systems. - The AML/CFT authority leverages knowledge of UoT staff in carrying out its AML/CFT responsibilities. - ICP 23 - Group-wide Supervision — LO - The ICP contemplates a supervisory framework for insurance groups that sets out the preconditions for group-wide supervision, group-wide regulatory requirements and group-wide supervisory review and reporting. This does not currently exist in Turkey though many of the powers and processes for carrying out group wide work currently exist. - The UoT is aware of this and is working to develop its framework. - ICP 24 - Macroprudential Surveillance and Insurance Supervision — PO - The UoT identifies, monitors and analyses extensive market, financial, and insurer data but does not yet have a formal macro-prudential framework that feeds into its day to day supervisory programs or supervisory priority setting. - ICP 25 - Supervisory Cooperation and Coordination — LO - Establishment of a group wide supervisory framework in the future would strengthen this rating. - ICP 26 - Cross-border Cooperation and Coordination on Crisis Management — PO - There is no plan/procedure manual for a crisis management; and - There is currently no requirement for insurers to establish contingency plans and procedures for use in a going and gone concern situation. ### Overall observance summary (Table 7) - Observed (O): 3 - Largely Observed (LO): 15 - Partly Observed (PO): 8 - Not Observed (NO): 0 - Total: 26 *Source: IMF assessment content provided in the supplied content unit.* ### 65. Table 8 lists the suggested steps for improvement of the level of observance. Some of ### Table 8. Turkey: Recommendations to Improve Observance of ICPs ### High-level findings on supervisory structure and legal framework - The regulation and supervision of the insurance sector is the responsibility of the UoT, carried out principally through the General Directorate of Insurance (GDI) and the Insurance Supervision Board (ISB). - Authority to regulate and supervise is established under Treasury Law 4059, Insurance Law 5684 and RMSIPPS. - The stated objectives in Insurance Law 5684: “...to provide for the development of the national insurance sector, to protect the rights and benefits of policy holders, and to promote that the insurance sector operates effectively in a safe and stable manner.” - RMSIPPS Article 5 objective: “the objective of insurance supervision and monitoring performed by the Undersecretary is to improve the insurance and pension system and to create an effective fair, safe, and stable insurance and private pension market”. - GDI has proposed and government has accepted amendments to primary legislation 4 times during the last five years; 50 amendments to regulations have been proposed and accepted during the same time period. - Assessment of ICP 1 (Objectives, Powers and Responsibilities): Largely Observed. Recommendation: amend primary legislation at next opportunity to clarify that the principal objective is the maintenance of a fair, safe and stable insurance sector for the benefit and protection of policyholders. ### Independence, governance and accountability of supervisor (ICP 2) - UoT is part of the Executive arm, attached to the Office of the Prime Minister and headed by an Undersecretary. - Major UoT General Directorates include Insurance (GDI); ISB is a “directly affiliated unit”. - Major licensing and some intervention decisions are vested in UoT; the most serious intervention powers (e.g. strengthening financial structure under Article 20 of Insurance Law 5684) rest with the Minister. - Appointment and dismissal: Undersecretary and ISB supervisors appointed with approval of President, the Prime Minister and the Minister (joint decree); no special requirement to publish reasons for dismissal. - UoT prepares strategic plan and annual reports; internal audit performed by a special audit unit within the Treasury; Turkish Court of Accounts may review programs. - Assessment of ICP 2: Largely Observed. - Recommendation: explore options to improve independence, governance and accountability, including: - Establishing a standalone regulatory agency for insurance and pensions supervision; - Attaching insurance and pensions supervision (including GDI and ISB) to either the BRSA or the CMB; - Developing a “twin peaks” model, with responsibility divided along prudential and market conduct lines. ### Information exchange and confidentiality (ICP 3) - Insurance Law 5684 Articles 28, 29, 31, and 35 and RMSIPPS Article 32 set out powers to request and exchange information and confidentiality protections. - UoT signed the IAIS Multilateral MOU on Cooperation and Information Exchange in 2013. - In practice, information requests from Netherlands, Malaysia, Germany, and Singapore were generally processed within 2 weeks of receipt; ISB has conducted joint inspections with the Netherlands regulator. - Assessment of ICP 3: Observed. Comment: legislation meets standards including confidentiality and legitimate purpose requirements. ### Licensing (ICP 4) - Licensing rules in Insurance Law 5684 (Articles 3, 5-7 and 35) and related regulations: define insurance activities, prohibit unlicensed activities, set permissible legal forms, allocate licensing responsibility, and set procedures for foreign branches. - Application processing times: initial license within three months; additional licenses within two months (provided documents are not deficient). - ISB conducts on-site assessments of new insurers as part of licensing. - Assessment of ICP 4: Largely Observed. - Comment: UoT does not have information on the natural person controlling beneficiary for all licensed insurers (see ICP 6). ### Suitability of persons (ICP 5) - Suitability requirements established for founders, board members, general managers and deputy general managers, managing directors, equivalent managers, auditors, persons controlling legal entities holding majority interest, employees with signatory authority, accounting branch directors/employees, employees performing investment/derivative operations, and central branch managers of foreign branches. - Integrity requirements include not being bankrupt, being of good repute, and no convictions for financial crimes; competency requirements include relevant education and experience (insurance, economics, business, accounting, law, finance, mathematics, statistics, actuarial or engineering fields). - Regulatory filing requirements exist for appointment of founders, significant owners, board members, general manager, assistant general managers, auditors, other directors and signatory employees. Article 9(5) requires insurers to notify UoT if significant shareholders no longer meet suitability criteria; similar explicit notification requirement for officers or directors appears absent. - Assessment of ICP 5: Largely Observed. - Recommendations: - Strengthen regulatory requirements to ensure insurers report when officers or directors no longer meet suitability criteria to UoT. - Consider developing more specific competency requirements for people in control functions (e.g. risk management). - Ensure all natural person controlling beneficiaries meet suitability requirements. ### Changes in control and portfolio transfers (ICP 6) - Article 9 of Insurance Law 5684: shareholders who directly or indirectly hold 10 percent or more (and other thresholds 20 percent, 33 percent, 50 percent) of capital or voting rights, or rights to nominate board members, must meet suitability requirements; share acquisitions reaching or crossing 10%, 20%, 33%, or 50% are subject to UoT authorization. - UoT has information on major shareholders but does not have a complete list of natural person controlling beneficiaries of all insurance companies. - Portfolio transfers under Article 10 must be approved by the Minister; applications include certified resolutions, articles of association, transfer agreement, and detailed report including business plan. Article 22 of the Regulation requires transfers be prepared “in a way that does not include provisions detrimental to the rights and interests of the insured”. - ISB supervisory practice: verifies transfers via on-site visits assessing policyholder information, valuation of portfolio, protection of policyholder rights, and transferee capital adequacy. - Assessment of ICP 6: Partly Observed. - Comments and recommendations: - UoT should develop and maintain a list of natural person controlling beneficiaries. - Portfolio transfers should be subject to approval by the insurance supervisor rather than the Minister. ### Corporate governance (ICP 7) - Few insurance-specific corporate governance rules in Insurance Law beyond minimum board size (not less than five members including General Manager; General Manager not to be Chair). - Turkish Commercial Code 6102 (revised July 2012) sets general company governance provisions. - UoT Circular on Corporate Governance Principles for insurance/reinsurance/pension companies is general, requires a Corporate Governance Committee and annual report against six principles (equity/transparency/accountability/responsibility; protection of shareholder rights; transparency; protection of stakeholder rights; board/manager conduct; wage policy considerations). - Weaknesses: broad/generic circular lacks specificity and enforceability for ICP 7.2, 7.6, 7.9, 7.10; combined board/management committees in some insurers compromise oversight; limited board reporting requirements from control functions; lack of insurance expertise on some boards. - Assessment of ICP 7: Partly Observed. - Recommendation: strengthen and make legally enforceable corporate governance requirements, consider a new corporate governance and internal controls regulation mixing mandatory and voluntary (apply or explain) requirements. ### Risk management and internal controls (ICP 8) - Article 4(8) of Insurance Law 5684 requires insurers to establish effective internal control system including internal audit and risk management. Regulation on Internal Systems sets further requirements. - Regulation requires internal audit unit (Article 4(4)) reporting directly to the Board; risk management unit not required unless requested by UoT. - Compliance function independence not required; reporting lines imply control staff report to management rather than Board (Article 10(8)). - Actuarial function: Article 21(1) requires sufficient number of licensed actuaries; Regulation on Actuaries Article 11(2) requires actuary to report calculations to Board, but no explicit requirement for a separate actuarial control function that reports periodically to the Board on pricing adequacy, technical provisions, stress testing, ORSA, or material actuarial risks. - Internal audit function: Article 4(4) requires separate internal audit unit with administrative independence reporting directly to the Board; Article 13-16 detail qualifications, responsibilities and annual audit plan. - Outsourcing: Under Article 33 of Insurance Law 5684 UoT may procure consultancy but law does not permit outsourcing of supervisory program activities; insurers must retain oversight and accountability over outsourced internal audit. - Assessment of ICP 8: Partly Observed. - Recommendations: - Require insurers to establish all four internal control functions required by the ICP (risk management, compliance, actuarial, internal audit) with appropriate independence and resources. - Require actuaries to opine on adequacy of premium pricing. - Require external auditors to opine on adequacy of insurer’s risk management and internal control systems. ### Supervisory review and reporting (ICP 9) - Regulatory authority for monitoring and supervision in Insurance Law 5684 and Regulation on Monitoring and Supervision; Article 28 provides ISB with broad supervision powers. - IMS (Insurance Monitoring System) collects quarterly and audited annual financial statements and statutory capital adequacy reports; includes indicators to detect inaccurate reporting and an online consumer complaint reporting component. - SEUS Company Risk Assessment Methodology: risk scoring early warning model, qualitative survey of governance/internal controls, earthquake scenario analysis and stress testing module. - Onsite inspections: planned and unplanned exercises across many areas (brokerage, actuarial, data processing, financial accounting, intra-/extra-group operations, claims, underwriting, investment policy, ALM, etc.). ISB has supervisory manuals; results reviewed by ISB committee before approval and potential enforcement by GDI. - Conduct of Business (COB) supervision is largely complaint-driven; thematic COB reviews not currently conducted. - Group supervision: 14 insurance groups identified; BRSA is group-wide supervisor in most cases; no group-wide supervisory framework yet; scope determined by a Committee with UoT, BRSA, CMB participation. - Assessment of ICP 9: Largely Observed. - Recommendations: - Consider integrating offsite, onsite and enforcement activities within a single supervisory organization to improve timeliness and efficiency. - Develop a more fulsome and risk-based approach to Conduct of Business supervision (market analysis, offsite/onsite monitoring, thematic review). - Continue development of a group-wide supervisory framework. ### Preventive and corrective measures (ICP 10) - Insurance Law 5684 Articles 20 and Regulation on Financial Structure Articles 11–13 provide a range of remedial measures; Minister has power to take progressive actions including requiring recovery plans, increasing capital, disposing assets, convening shareholder meetings, replacing directors, assigning trustees, liquidation. - Regulation On The Measurement And Assessment Of Capital Adequacy sets intervention requirements: if solvency ratio falls between 70 percent and 100 percent an insurer must submit a plan to increase capital to 100 percent of the solvency ratio within one year; other timeframes include 1.5 years for lower thresholds. - UoT practice: warnings and supervision have been used frequently: - 38 criminal complaints against unauthorised insurance intermediary activities since 2010. - 4 companies being monitored closely within Article 20 scope; of these, 2 have two board members from UoT assigned by the Minister. - At the end of 2014, 13 companies had a capital deficit and were sent a warning letter requiring a recovery plan; at the end of 2015 there are 14 companies with a capital deficit. - Three companies had the right to conclude further insurance contracts revoked; 6 companies in liquidation; two companies had liabilities transferred to other companies and licenses revoked. No policyholder losses reported in these entities. - Assessment of ICP 10: Largely Observed. - Recommendations: - Consider amending law to vest timely preventive and corrective action powers in the Insurance Supervisor rather than the Minister. - Consider amending the Regulation on Measurement and Assessment of Capital Adequacy to empower the Supervisor to set timeframes for insurers to improve capital (current timeframes of one year and 1.5 years may be excessive). - Develop a formal “ladder of intervention” published to increase transparency and consistency. ### Enforcement (ICP 11) - Article 20 and associated regulations empower the Minister to impose a broad range of enforcement measures; UoT can initiate administrative penalties (1,000 TL to 25,000 TL) applied by UoT; judicial penalties (significant fines and prison up to 12 years for certain frauds) require UoT application to Public Prosecutor. - Appeal of supervisory decisions to the court system under Procedure of Administrative Justice Act No. 2577; appeal does not stay execution of decision. - Assessment of ICP 11: Largely Observed. - Recommendation: vest major enforcement decision-making authority with the supervisory authority rather than the Minister to increase independence, transparency and accountability. ### Winding-up and exit from the market (ICP 12) - Article 10 requires voluntary winding up, merger or acquisition approval by the Minister. - Article 10(4) establishes priority of policyholder claims as third after employee wages and taxes, and after payment of Minimum Guarantee Funds to policyholders. - Article 20(3) empowers Minister to revoke license, suspend business or block assets if company equity falls below Minimum Guarantee Fund or other severe conditions. - Legislation does not specify a defined point at which an insurer must cease business (no mandatory trigger); decision-making rests with Minister. - Assessment of ICP 12: Partly Observed. - Recommendations: - Amend insurance legislation to ensure supervisory authority, not the Minister, has authority to wind-up an insurer. - Establish a clear point at which it is no longer permissible for an insurer to continue business (potentially tied to a risk-based solvency requirement). ### Reinsurance and other risk transfer (ICP 13) - Licensing applicants must submit reinsurance plan; Article 15 of Regulation on Financial Structures requires an annual Board-approved reinsurance strategy including types of treaties, estimated net retention, selection of reinsurers, maximum coverage per reinsurer, monitoring financial adequacy of reinsurers, and oversight of the reinsurance program. - UoT maintains a list of acceptable reinsurers based on ratings; reinsurance with non-listed reinsurers is not recognized in solvency calculation. - Within a month of executing reinsurance treaties insurers must report details including contracts, premiums/commissions/expenses, models and maximum probable loss, and any affiliation with reinsurer. - Large transactions (exceeding 5% of equity capital) require reporting and reinsurance details. - Documentation practice monitored via on-site exams; alternative risk transfer is permitted but not prevalent. - Assessment of ICP 13: Largely Observed. - Recommendations: - Amend legislation to require explicitly that insurers promptly document all reinsurance transactions. - Consider developing specific requirements for alternative risk transfer as market develops (e.g. prior UoT approval). ### Valuation (ICP 14) - Accounting/financial reporting standards set by Turkish Public Oversight, Accounting and Auditing Standards Authority; TFRS fully compliant with IFRSs. - Technical provisions valuation: actuarial principles used by licensed company actuaries; technical provisions do not include a Margin Over Current Estimate (MOCE) and do not discount cash flows (no supervisor-set discount rates). - Reserving requirements: Regulation on Technical Provisions (2007) specifies Unearned Premium Reserve, Unexpired Risk Reserve, Outstanding Claims Reserve, Equalization reserve (12 percent of premiums written for credit and earthquake insurance), IBNR (methodologies approved by licensed actuary), Bonus and Rebates reserve, and for life products Mathematical Reserves including dividend provisions. - Actuaries required and opine on adequacy of reserves but not required to opine on adequacy of premiums. - Assessment of ICP 14: Largely Observed. - Recommendation: as part of Solvency II transition planning, revise reserving requirements to provide explicit MOCE, discounting of cash flows and more sophisticated earthquake/catastrophe reserving. ### Investment (ICP 15) - Article 14/A of Regulation on Financial Structures requires Board-approved annual investment policy covering risk profile, ALM strategies, diversification, limits, prohibited assets, rules on mortgages/loans against assets, rules/limits on derivatives and accountability in asset transactions. - Guaranteed funds (Minimum Guarantee Fund equals one third of required equity capital) and technical reserves subject to conservative permissible asset rules and limits (examples include: - Equalization reserve equal to 12 percent of premiums written for credit and earthquake insurance (from ICP 14 context); - Maximum limits for coverage of technical reserves e.g. single unit of land/property: 10%; privately issued financial instruments 40% (individual instruments 10%); loans not connected to insurance contract: 5% (1% single individual); cash in Turkish Lira and foreign currencies: 3%; deposits/receivables guaranteed by a single bank: 40%; group bank: 20%; foreign currency investment by non-currency-risk companies: 30%). - UoT may temporarily allow breaches and vary scope by up to 50 percent and can accept/reject asset types covering technical reserves. - Assessment of ICP 15: Largely Observed. - Recommendations: - Consider more specific requirements regarding derivatives (e.g. only for hedging purposes). - Amend legislation to establish a stronger duty of care for directors to act prudently in the interests of policyholders (e.g. “prudent person” investment definition). ### Enterprise Risk Management and ORSA (ICP 16) - Current legislation does not specifically require an ERM framework or ORSA. - Article 4(8) requires effective internal control including internal auditing and risk management, but regulation falls short of full ICP requirements. - No explicit requirements for Board-approved risk tolerance statements, ERM linking risk tolerance to regulatory/economic capital, explicit risk definitions, or ALM policy. - Assessment of ICP 16: Partly Observed. - Recommendation: begin industry dialogue on ERM frameworks and gradually expand internal control and risk management requirements to include ORSA, risk tolerance statements, interconnected risk management, AML and capital plans and feedback loops for entities and groups. ### Capital adequacy (ICP 17) — introductory points - Minimum capital requirements for licensing set by Circular No 2007/4 on Capital Amounts Set Out for Insurance Branches. - Basic capital for a non-life insurer or reinsurer is fixed at TL 5 mn. (further capital requirements for each type of business written are specified but not fully reproduced in this extract). - Assessment and detailed discussion of solvency measures, transition to Solvency II Pillar One, and solvency control levels appear in the recommendations elsewhere in Table 8 (recommendations include continued transition towards Solvency II Pillar One and establishing a clear solvency control level below which an insurer will not be allowed to operate). *Source: cr1747 — Table 8 and detailed ICP assessment (excerpts provided).* ### 6.6 mn. or non-life insurance companies writing all non-life insurances and TL 4 mn. for ### cr1747 - 6.6 mn. or non-life insurance companies writing all non-life insurances and TL 4 mn. for ### Capital requirements and minimum guarantee funds - Basic capital requirements: - Non-life insurer writing all branches: TL 11.6 mn. - Non-life reinsurance company: TL 9 mn. - Life insurer or reinsurer basic capital: TL 5 mn. - Additional capital per class of life insurance business up to TRY 5.7 mn. for insurance companies writing all classes of life insurance and TL 3 mn. for reinsurance companies. - Maximum capital for a life insurer: TL 10.7 mn. - Maximum capital for a life reinsurance company: TL 8 mn. - Minimum Guarantee Fund: - Defined as an amount equal to one-third of the equity capital required for the insurer or reinsurer. - Article 4 requires the minimum guarantee shall not be lower than one-third of the minimum capital requirement. - For life insurance (and personal accident, sickness and health insurance contracts) the guarantee is: mathematical reserves plus outstanding claims reserves less loans and mathematical reserves corresponding to premiums not yet collected (as of the end of capital requirement accounting periods). - Guarantee funds may only be invested in assets described in Article 5 of the Regulation on Financial Structures of insurance, Reinsurance and Pension Companies. - Equity capital composition (Article 4 of the Regulation on the Measurement and Assessment of Capital Adequacy of Insurance and Reinsurance and Pension Companies): - Core capital: paid-in capital, net profit for the period, and profit and capital reserves. - Supplementary capital: equalization provisions and quasi-equity loans. - Other capital items: a portion of subscribed capital. - Assets offered as guarantees are “blocked” in Turkish Banks, or within Istanbul Stock Exchange Settlement and Custody Bank on behalf of the UoT. - If an insurer lacks required equity capital or the guarantee fund is not compliant, it is considered to have a weakened capital structure and is subject to preemptive and enforcement measures under Article 12 and Article 13 of the Regulation. ### Solvency margin requirements and control levels - Solvency margin definition: ratio of available equity capital to required equity capital; evaluated in June and December each year. - Required capital is the higher of two sums derived from: - Solvency I Formula (Article 7): closely resembles EU Solvency I; involves the higher of two estimates based on premium income and claims experience. - Risk Based Capital Formula (Article 8): based on predetermined factors covering asset risk, reinsurance risk, excessive premium increase risk, outstanding claims reserve risk, underwriting risk and exchange rate risk. - Solvency control levels: - Intended solvency ratio target: exceed 115 percent. - If solvency ratio is between 100 and 115 percent: company must prepare a report explaining reasons and expectations for future assessment periods. - If ratio between 70 percent and 99 percent: company must submit a plan for closing the capital deficit within a year. - If ratio between 33 percent and 69.99 percent: company must submit a plan to increase capital to 70 percent within six months and to 100 percent within the next one year. - If solvency ratio falls below 33 percent: the Minister may take stronger actions to strengthen the company’s financial structure or liquidate it under Article 20 of the Insurance law 5684 and the Regulation on Financial Structures of Insurance, Reinsurance, and Pensions Companies. - Use of Internal Models: not currently permitted by UoT. - Ongoing initiative: committee established to study Solvency II and harmonize Turkish requirements; full implementation expected to take several years. ### Assessment and recommendations on solvency regime - Assessment: Partly Observed. - Key assessment comments: - Current solvency approach is standardized, not a total balance sheet approach. - Solvency I does not consider interdependence between assets, liabilities, regulatory capital requirements and capital resources. - Risk based formula does not cover all major risks (e.g., operational risk). - Solvency control levels do not clearly establish a minimum floor below which an insurer cannot operate; Minister has discretion to remediate rather than liquidate. - Existing control levels allow generous timeframes for insurers to correct deficiencies, potentially too slow to protect policy holders. - Recommendation: - Continue transition towards Solvency II Pillar One capital requirements as part of broader supervisory reforms. - Establish a clear solvency control level below which an insurer will not be allowed to operate. ### Intermediaries (ICP 18) — licensing, conduct, and supervision - Legal framework: - Part V of Insurance Law 5684 requires licensing of actuaries, insurance agents, brokers, and loss adjusters with UoT and the Union of Chambers of Commerce. - Specific regulations: Regulation on Insurance Agents (2014); Regulation on Insurance and Reinsurance Brokers (2015). - Insurance agents: - Suitability requirements: technical competency, integrity, minimum education, pass UoT technical proficiency exam, professional experience, no convictions for serious crimes. - Minimum property and asset requirement for individual agents: not less than 50,000 TL. - Corporate agencies: joint stock or limited liability companies, minimum paid up capital of not less than 300,000 TL for headquarters and 25,000 TL for each branch; senior managers 5 to 7 years' professional experience and 4 years' higher education; each branch must employ at least one manager and one technically qualified person. - Agency agreements must cover parties, duration/renewal/termination, scope of authority, commission amounts, issuance of policies, collection of premiums, warranties, settlement of accounts. - No mandatory obligation for agents to have professional indemnity insurance though UoT may require it. - Banks and Financing and Leasing companies allowed to act as agencies with appropriate licensing modifications. - Call centers may be operated by licensed intermediaries; sales must be by certified staff or approved script-following staff. - Insurance brokers: - Defined under Insurance Law 5684; may be natural or legal persons. - Must meet competency and integrity requirements, have adequately equipped location, minimum paid up capital (corporate brokerages: 250,000 TL plus 50,000 TL for each class of insurance business and 25,000 TL for each branch), and equity capital tied to payables owing to insurance companies. - Mandatory professional indemnity insurance; UoT advises liability limit must be at least 5 million TL. - Ongoing supervision: - Agents and brokers licensed and supervised by UoT and Union of Chambers of Commerce and Commodity Exchanges. - UoT website for public complaints. - Major contraventions by agents handled by Insurance Agents Executive Committee (appointed agent representatives and government officials); authority to suspend agents for six months for first contravention and revoke for repeated contraventions. - Committee has three investigative staff and faces more than 1,700 disciplinary files per year; no insurer or non-industry (lay member) representatives on the committee. - Brokers subject to regular periodic reporting and occasional on-site supervision; agents’ supervision usually complaint-driven. - Corporate governance supervision: checking suitability of personnel and periodic onsite monitoring. - Assessment: Partly Observed. - Main concerns: - Level of ongoing supervision for agents is inadequate. - No requirement to disclose basis of agents’ remuneration or potential conflicts to customers. - Code of Conduct for intermediaries is general and contains few specific rules. - Recommendations: - Expand representation on the Insurance Agents Executive Committee to include insurer, intermediary and lay members; broaden mandate to cover all intermediaries and increase enforcement powers and resources. - Develop a more fulsome and rule-based code of conduct for intermediaries. ### Conduct of business (ICP 19) — consumer protection and product oversight - Legal and supervisory obligations: - Article 32 of Insurance Law 5684: insurers, reinsurers, intermediaries and loss adjusters must refrain from acts that may endanger insureds’ rights and benefits. - Article 27/A of the Regulation on Establishment And Working Principles requires insurers to ensure fair treatment of insureds and to establish systems (not specifically required to be board-approved) including oversight of agents and employee training. - Insurance Agents Executive Committee established a Code of Ethics and Code of Professional Conduct for agents. - Product development and marketing: - Major compulsory products (e.g. Motor third party liability, residential earthquake) and Casco required to use standard policies developed with UoT; UoT reviews all policy documents for compliance with law and Turkish Commercial Code, but not specifically for plain language. - Article 32 prohibits misleading marketing; enforcement authority rests with the Advertising Board under the Consumer Protection Act rather than the insurance supervisor. - Regulation on Furnishing Information in Insurance Contracts requires signed information forms in a UoT-approved format at point of sale; similar rules for distance marketing and credit insurance via banks. - Failure to comply allows policy holder to cancel contract and claim damages; may result in administrative penalty from UoT. - Advice, conflict of interest and disclosure: - Agents required by Code of Professional Conduct to recommend appropriate products, but no requirement to document client needs. - Brokers required to present at least three proposals and a comparison statement. - No general requirement for intermediaries to disclose how they are remunerated; some investment-related products disclose commissions in information forms. - Intense competition over commissions; industry concern that disclosure may prompt customers to request further commission discounts. - Claims and complaints: - Article 32 requires insurers not to delay payment of claims; Turkish Commercial Code sets time frames. - Insurers required to maintain a complaint handling unit, complaint policies, and report regularly on claims to UoT. - Complainants must receive a written response within 15 working days. - Agents must assist customers in conveying complaints to insurers. - Complaints can be made to UoT; investigations are by GDI or ISB depending on nature; intermediary complaints may be referred to the Insurance Agents Executive Committee. - Privacy: - Article 31/A prohibits disclosure of insured persons’ secrets; obligation continues post-employment and post-contract termination, with exception for wrongful insurance practices shared with Insurance Information and Monitoring Center. - Practical enforcement limited; practice of stealing client lists by agents changing agencies appears prevalent and contravenes privacy rules. - Supervision activities: - UoT conducts off-site and on-site supervision of conduct; large number of corporate agencies (in excess of 1600) limits ability for effective regular ongoing supervision. - Assessment: Largely Observed. - Recommendations: - Strengthen conflict of interest/disclosure of compensation rules for intermediaries. - Require Board approval for policies related to fair treatment of consumers and regular Board reporting on adherence. - Require operational separation of insurer complaint handling functions from the programs subject to complaints. - Vest power to act against deceptive and misleading advertising with the insurance supervisor rather than the Advertising Board. ### Public disclosure (ICP 20) - Scope and legal framework: - Disclosure requirements apply to all insurers licensed in Turkey, including insurance pools and authorized foreign branches. - Article 18 of Insurance Law 5684: insurers and reinsurers must arrange, publish, and send accounts and financial statements to UoT in principles and sample formats determined by UoT. - Regulation on Financial Structure establishes detailed annual report requirements (Articles 16–21), including content, consolidated requirements, signing/approval, audit, timing, publishing and five-year web availability. - Regulation Pertaining to Provision of Disclosure in Insurance Contracts requires corporate websites to present wide range of up-to-date financial information. - Communiqué on Presentation of Financial Statements sets form and substance for comparability; Regulation on Financial Reporting requires announcement in two daily newspapers and website publication. - Timing: - Annual reports must be available on website before the end of May after accounting period end and in printed form by the end of June. - Technical provisions and capital adequacy disclosure: - Communiqué requires qualitative and quantitative information on technical provisions in financial statements and notes. - Communiqué on Presentation of Financial Statements requires disclosure enabling evaluation of capital objectives, policies and processes, facts and figures related to capital management, and changes year over year. - Companies are required to disclose information on guarantees in proportion to commitments from insurance contracts, but are not required to disclose the solvency ratio. - Investment, ERM/ALM, corporate governance: - Some investment class information provided, but investment objectives, policies and processes not specifically required. - No disclosure requirement for quantitative and qualitative ERM/ALM information; ERM is not presently required in Turkey. - Some corporate governance information provided in annual reports. - Assessment: Largely Observed. - Recommendation: - Expand disclosure requirements to include capital adequacy, investment objectives and policies, ERM/ALM, and company information on market conduct policies and risks (e.g., management of complaints). ### Countering fraud in insurance (ICP 21) - Legal and regulatory framework: - Fraud defined in Articles 157 and 158 of the Turkish Criminal Code; Article 158 prescribes between two and seven years imprisonment and a large fine for insurance fraud. - Regulation on Detection, Notification and Recording of Wrongful Insurance Practices establishes framework under Article 32 of Insurance Law 5486. - Contravention of the Regulation can result in administrative penalty between one thousand and twelve thousand TL. - Regulation requires companies and intermediaries to establish prevention, detection, recording and elimination methods; report wrongful practices to UoT and the Police; train employees including Board with UoT-approved training; and record wrongful transactions in an insurance database accessible to insurers, UoT and the Insurance Information and Monitoring Center. - Supervisory practices: - UoT assesses insurer practices via on-site supervision and periodic review. - Fraud Bureau established in 2015 with Insurance Information and Monitoring Center; approximately ten staff; in 2015 opened more than 1200 files and referred 45 files (involving more than 1 million TL in fraudulent transactions) for prosecution. - UoT and Fraud Bureau share information with legal authorities and other supervisors as required. - Assessment: Observed. ### Anti-Money Laundering and Combating Financing of Terrorism (ICP 22) - Framework and responsibilities: - MASAK is the AML/CFT authority under Law No.5549 and Law No.6415. - UoT is not a designated AML/CFT authority but MASAK uses UoT examiners and actuaries to conduct AML/CFT supervision and inspections; ISB examiners have relevant expertise. - Chairman of ISB and General Director of GDI are members of the Coordination Board for Combating Financial Crimes. - UoT conducts periodic on-site supervision to evaluate internal control systems and compliance for AML/CFT in addition to MASAK inspections. - UoT does not have a specific mechanism for sharing AML/CFT information with other authorities; MASAK has an information sharing mechanism with domestic authorities. - Regular coordination meetings by MASAK are held every April and September; Treasury can request information from MASAK and other authorities. - Assessment: Observed. ### Group-wide supervision (ICP 23) - Background and coordination: - Regulation and supervision historically focused on legal entities. - 2010 Cooperation and Information Exchange Protocol among Central Bank, Savings Deposit Insurance Fund, BRSA, CMB, and UoT sets objectives including information sharing and joint supervision. - Protocol enables annual meetings to set entities and scope of supervision, teams, timing, and mode; allows international cooperation. - Protocol currently provides for sharing of financial statement documents with UoT. - UoT amended regulations to better enable group supervision and is developing a supervision manual for group supervision. - Practical application: - In practice, three cross-sector financial groups (of approximately 14) selected for detailed supervision each year for last three years. - Joint on-site examination conducted with supervisory staff from the Netherlands for a major insurer. - Framework issues: - The ICP-consistent supervisory framework for group-wide supervision does not yet fully exist, though powers and processes for group work largely exist. - Under the agreement a committee, rather than the group-wide supervisor, determines scope and entities subject to supervision. - UoT can enter into joint audit and mutual information sharing protocols in groups where an insurer is part of a financial holding. - Assessment: Largely Observed. - Recommendation: - Develop a more detailed monitoring and supervision framework and allow the group-wide supervisor (in most cases the BRSA) rather than the committee to determine scope and entities subject to supervision. ### Macroprudential surveillance (ICP 24) - Current practices: - UoT identifies, monitors and analyses extensive market, financial, and insurer data but lacks a formal macro-prudential framework integrated into day-to-day supervisory programs. - UoT produces an annual sector report, uses early warning indicators and industry benchmarking, and requires submission of audited financial statements, actuarial reports, reinsurance reports and other data via an Information Management System Portal. - Macroeconomic level analysis is less systematic, focuses on past trends and lacks use of forecasting techniques; work does not extend to financial groups. - UoT involved in stress testing with other regulators (notably for earthquake risk) but has no systematic program of stress testing. - No systemically important insurers identified currently. - Assessment: Partly Observed. - Recommendation: - Develop a systematic macroprudential framework integrated into general supervisory program for insurance. ### Supervisory cooperation, cross-border coordination, and crisis management (ICPs 25–26) - Cooperation and coordination (ICP 25): - UoT is signatory to IAIS MMOU; exchanges information with foreign and domestic supervisors and participates in supervisory colleges. - Protocol agreement with BRSA and CMB allows joint supervision of insurance groups; UoT participates in Systemic Risk Assessment Group headed by BRSA. - Assessment: Largely Observed. - Comment: Establishment of a group-wide supervisory framework would strengthen this rating. - Cross-border crisis management and contingency planning (ICP 26): - UoT exchanges information and participates in supervisory colleges and MOUs, but lacks systematic proactive plans for cross-border crises and has no internal documented plans/procedures for future crises. - UoT does not require insurers to maintain contingency plans for going- and gone-concern situations. - Assessment: Partly Observed. - Recommendations: - UoT to develop an internal procedure manual or contingency plan for a financial crisis. - Require insurers (particularly large insurers with cross-border or cross-sectoral linkages) to establish contingency plans and procedures based on specific risk profiles for going- and gone-concern situations. ### Authorities’ response - UoT thanks FSAP team and notes commitment to continuous improvement. - UoT remarks progress reflected in ICPs 2, 3, 13, 21, 22 and 25. - UoT believes it meets observance criteria for ICPs 8, 9, 12, 14, 19, 20 and 24 and requests further discussion and clarification on evaluation criteria. - UoT commits to refine regulatory and supervisory framework and increase compliance with ICPs taking assessors’ comments into consideration. *cr1747 - 6.6 mn. or non-life insurance companies writing all non-life insurances and TL 4 mn. for* ### REFERENCES ### REFERENCES ### Citations - IAIS, 2012, Insurance Core Principles and Methodology, available at the IAIS web site www.iaisweb.org . *Source: cr1747 - REFERENCES* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1747.pdf_