Turkish insurance and pension market had a vibrant year during 2017 in terms of legal regulations. Auto enrollment system left its mark on the pension market, and price cap system stamped the insurance market with deep impacts.
During 2017, 13 circulars, 7 regulations, 5 sectoral announcements and 2 cabinet decrees were issued for Turkish insurance and pension sector. In this section, we have reviewed the legal regulations that closely concern the market and were discussed fiercely during 2017 with their impacts.
Automatic enrollment launched with the new year
The first regulation of the year was the “Regulation on the Procedures and Principles regarding the Automatic Enrollment of Employees in a Pension Plan Through A Pension Contract Arranged by Employers” which came into force as of 1 January 2017. The new regulation was decided to be issued by the Cabinet in accordance with the Bylaw 2 and Provisional Article 2 of the Law on Individual Pension Savings and Investment System upon the note by the Undersecretariat of Treasury dated 11 November 2016 and numbered 32665. The purpose of this regulation was announced to be the determination of workplaces and employees to participate in the pension plan, rate of employee contribution to be deducted from employees’ salaries and procedures and principles to regulate the system. The regulation applies to employees who are under the age of 45, and employers that employ people who were under the age of 45 when they began working for that employer and after the employer was included in the scope of the system. According to the regulation that covers the public and private sectors, employees who were working for an employer with 1000 or more employees joined the system as of 1 January. Employees working for an employer with 250 to 999 employees joined on 1 July 2017, employees working for an employer with 50 to 99 employees joined on 1 January 2018. Employees of workplaces with 10 to 49 employees will join the system as of 1 July 2018, and employees working at workplaces with 5 to 9 employees will join as of 1 January 2019. 3 percent of the base salaries of employees is deducted as contribution amount.
Risk scope changes for agricultural insurance
2nd regulation of the year 2017 came into force as of 2 January with a Cabinet Decision regarding the agricultural insurance system. According to the Cabinet Decision on the Premium Support Rates, and Risks, Products and Regions to be Included in the Scope of Agricultural Insurance Pool”, hail package for crops includes main hail risk as well as the subsidiary risks of storm, whirlwind, fire, landslide, and submersion. The package can be extended on a voluntary basis to include frost coverage for fruits cultivated in open areas, hail weight coverage for orchards, as well as damages by wild boars and rain coverage for cherry. Fruit trees and grapevines will be covered against the risks of hail, storm, whirlwind, fire, landslide, vehicle crash, weight of snow, flood and submersion. Greenhouses are entitled to be insured against the similar risks, while cattle and sheep and goats can now be insured against death risk and theft. Poultry and aquaculture were included in the scope of state supported agricultural insurance; while beekeeping activities can be insured against the risks of storm, whirlwind, landslide, earthquake, flood and submersion, vehicle crash, transportation and wild animal attacks.
Change of tariff in compulsory earthquake insurance
According the Communiqué on the Tariff and Instructions for the Compulsory Earthquake Insurance which was announced on the same date, premiums to be paid by policyholders will be calculated by adding 10 TL to the calculation of the sum insured based on the earthquake region and construction type. This amount will be 15 TL for the risks located in İstanbul. Minimum premium amount will not be lower than 75, 65, 55, 45 and 35 TL respectively, for the earthquake risks zones from 1st to the 5th degree. Premiums will be reduced by 10 percent for buildings certified in 2007 or later; whereas a premium deduction of 20 percent will be applied in case all residents in a building/compound is insured at once. According to the Communiqué, the lowest amount for the sum insured will be 170 thousand TL.
Price cap, one of the most important regulations in 2017
Another circular was issued on 10 April 2017, deeply impacting the insurance market. Constantly increasing traffic premiums since 2015 had drawn reaction from policyholders and insurance rate began to decrease despite being a compulsory type of insurance. The Circular on the Premiums of Motor Vehicles Compulsory Third Party Liability Insurance brought along a new expansion on this area. The circular based on a price cap limitation announced: “For the sustainability of compulsory traffic insurance system, it is highly important that the premiums are high enough for insurance companies to compensate for the offered coverages and low enough for policyholders to be able to pay. This consistency is closely monitored by the Undersecretariat.” Price cap system was therefore put into force to be effective between 12.04.2017 and 31.21.2017. The circular decided that the price cap would be increased by 1 percent every month. The circular was severely criticized by the insurance market since the free tariff was left behind; however, it was appreciated by the policyholders as the premiums were decreased. Several discount increase rates were also determined for the application, while price caps were determined according to the vehicle type and scales based on cities.
Excess of loss support in agricultural insurance
According to the Cabinet Decision on the Excess of Loss Support Committed by the State for the District-Based Drought Insurance in Agricultural Insurance Pool, a risk sharing and reinsurance plan for the district-based drought productivity insurance was approved by the Board of Agricultural Insurance Pool. According to this plan, the state committed excess of loss support for over 150 percent of the loss ratio in district-based drought productivity insurance that arises from insurance contracts signed between 1.1.2017 and 31.12.2017 but cannot be transferred via reinsurance and retrocession.
Pool model in traffic insurance
Another radical change for the insurance market came with a regulation issued as of 11 July 2017 for traffic insurance. According to the Regulation on the Amendment of the Circular on the Premiums of Motor Vehicles Compulsory Third Party Liability Insurance, a risky policyholders pool was established for grades and/or vehicle groups with high loss frequency to be applied starting from 12.04.2017. Premiums and losses concerning the traffic insurance policies within the scope of this pool will be shared among the insurance companies registered in Turkish Motor Insurers' Bureau. Within the scope of this pool application, insurance companies avoiding to draw insurance policies for those vehicles and therefore warned by the Undersecretariat will be prevented from accessing Insurance Information and Monitoring Center system screens, unless they fix this problem. This precautionary interruption will last for 3 to 10 days. According to the regulation, all vehicle groups in 1st, 2nd and 3rd grade as well as commercial taxis, minibuses, coaches, trucks and tow trucks in the 4th, 5th, 6th and 7th grades are included in the scope of traffic insurance pool. Premiums and losses accumulating in the pool will be distributed among insurance companies based on a two-phase calculation. 50 percent of premiums and losses paid will be distributed equally among the companies, while the remaining 50 percent will be calculated based on their share from traffic insurance premiums received in the last three years.
E-application in insurance
On 19 July 2017, Undersecretariat of Treasury issued the Circular on the E-Application System in Insurance. With this circular, insurers are obliged to respond to all manner of information requests regarding the contract which were conveyed as insurance complaints by the policyholder or their beneficiaries via written or electronic communication tools – including the payments to be done in accordance with the contract – within 15 business days after receiving the request. Therefore, in order to fulfill their obligations arising from this regulation, the insurer must establish a complaint team of at least 2 people to work for evaluating and resolving the complaints and information requests, and share the logs, records and statistics of all complaints with the Undersecretariat on a quarterly basis. In this context, insurance and pension companies and other institutions conducting insurance related activities will be receiving applications and complaints and responding them via E-devlet platform.
Price cap increase
On 1 September 2017, another circular was issued to make an amendment to the Circular on the Premiums of Motor Vehicles Compulsory Third Party Liability Insurance. The new circular stipulated that the maximum premium amounts would be increased by 1.5 percent on a monthly basis.
Pool model for the medical liability insurance
According to the Sectoral Announcement Regarding the Compulsory Medical Malpractice Liability Insurance, which was issued on 6 September 2017, principles for sharing the premiums and losses were determined in order to prevent problems about companies not drawing policies for compulsory medical malpractice liability insurance. The regulators decided that Güneş Sigorta would conduct the transactions for premium and loss sharing as a company licensed in the general liability branch. In accordance with this arrangement that provided coverage for policies issued before 1 July 2017, an audit committee shall be established consisting of 3 representatives from Undersecretariat of Treasury, Insurance Association of Turkey, and Güneş Sigorta. 50 percent of the premiums and losses paid will be distributed equally to companies in the pool; while the remaining 50 percent will be distributed based on the share they received from the premiums of compulsory medical malpractice liability insurance in the last 3 years. Undersecretariat will hold the authority to increase or decrease those rates by 20 points.
Principles of participation (takaful) insurance determined
The purpose of the Regulation on the Procedures and Principles of the Participation Insurance, which was issued on 20 September 2017, was to ensure the functioning, development, healthy monitoring, and reliability of the system as well as guarding the rights and benefits of the participants. Companies to engage in participation insurance activities will invest the accumulations of participants in interest-free financial tools. Insurance companies in this system will operate in proxy, mudarebe (share of profits based on labor-capital partnership) models, hybrid model of the two, or another model to be approved by the audit committee. Insurance companies will administer the risk fund consisting of participant contributions and funds of shareholders and members separately. They will administer a “participant investment fund” that includes the premium payments of participants made with saving purposes and the revenue generated from those payments via the tools of participation finance. According to the conditions set forth in the Insurance Law, insurance companies will be able to employ the ‘window model’ which means they can offer participation insurance products to their customers without founding a separate company. Operations of such companies will be limited to 3 years after the regulation comes into force.
Price cap system continues
The Circular on the Premiums of Motor Vehicles Compulsory Third Party Liability Insurance for 2018 was issued on 25 December 2017. This latest circular of 2017 stipulates that the price cap limitation will continue to be applied between 1 January 2018 and 31 December 2018. Moreover, maximum premium amounts from December 2017 will be increased by 5 percent with the beginning of 2018.