Turkey
Financial Sector Assessment Program-Detailed Assessment of Observance of the IAIS Insurance Core Principles

This paper presents an assessment of the observance of IAIS (International Association of Insurance Supervisors) insurance core principles in Turkey. During the last five years, the government of Turkey has made a significant effort to improve regulation and supervision of insurance and to improve adherence to international standards. The efficiency of information reporting, insurer monitoring, and supervision has greatly increased. Solvency tests have been strengthened. Reserving and investment practices have been improved. Improvements have been made in international cooperation and information exchange. However, major regulatory and supervisory challenges remain for Turkey to increase confidence in the sector and benefit from its continued growth.

Abstract

This paper presents an assessment of the observance of IAIS (International Association of Insurance Supervisors) insurance core principles in Turkey. During the last five years, the government of Turkey has made a significant effort to improve regulation and supervision of insurance and to improve adherence to international standards. The efficiency of information reporting, insurer monitoring, and supervision has greatly increased. Solvency tests have been strengthened. Reserving and investment practices have been improved. Improvements have been made in international cooperation and information exchange. However, major regulatory and supervisory challenges remain for Turkey to increase confidence in the sector and benefit from its continued growth.

Executive Summary

1. The insurance industry in Turkey is a small but growing part of the economy. In 2015, the sector comprised less than 3 percent of all financial services sector assets. From 2006 until 2015, however, gross premiums written grew at an average annual rate of approximately 22 percent (7.4 percent at constant prices), substantially above nominal GDP growth during the same period. Nevertheless insurance penetration remains below that seen in many countries in the region and very low compared to countries with similar per capita incomes in other parts of the world.

2. During the last five years, the Government of Turkey has made a significant effort to improve regulation and supervision of insurance and to improve adherence to international standards. The efficiency of information reporting, insurer monitoring and supervision has greatly increased. Solvency tests have been strengthened. Reserving and investment practices have been improved. Improvements have been made in international cooperation and information exchange, Anti-money Laundering and Countering Financing of Terrorism (AML/CFT) requirements have improved, management of fraud and market conduct requirements have improved as have licensing requirements for insurance brokers and agents.

3. Major regulatory and supervisory challenges remain, however, if Turkey is to increase confidence in the sector and benefit from its continued growth. Many challenges relate to the need to keep pace with an industry that is intensely competitive and has many participants engaged in a struggle to maintain or acquire market share. Some challenges are within the authority of the Undersecretariate of Turkey (UoT) to address while others will require changes in laws and regulations. They include the following.

4. The primary objectives of the supervisory authority should be clarified. 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.

5. In addition, the supervisory authority does not meet international standards for operational independence. Although some progress has been made over the last few years to improve the efficiency of insurance supervision, further work is required to meet international standards regarding independence, governance, and accountability. Under the existing supervisory model, these challenges will likely be difficult to achieve and therefore alternative program delivery models with increased independence should be considered (such as an independent supervisory authority covering both securities and insurance).

6. In spite of licensing, changes in control, portfolio transfers and suitability requirements that are generally in line with international standards, 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.

7. The supervisory authority should develop and enforce higher and more specific requirements for insurer corporate governance and internal controls. At a minimum, more specific standards should be developed and implemented regarding the composition of insurer Boards and the duty of individual Board Directors. In addition, the role and requirements for risk management and internal control functions should be expanded. These are necessary to help ensure that inappropriate risk taking does not take place and to help build the foundation needed to support more risk based supervisory systems.

8. In conjunction with strengthening governance and internal control requirements, more specific Enterprise Risk Management (ERM) requirements should be developed and implemented (e.g. Own Risk Solvency Assessment (ORSA) requirements, and ERM process) on an individual entity and group basis. Institutional governance would also benefit from requiring actuaries to opine on the adequacy of premium pricing policies and external auditors to opine on the adequacy of the insurer’s risk management and internal control systems.

9. In regard to supervisory review and reporting, the Insurance Monitoring System (IMS) and the Company Risk Assessment Methodology and Framework (SEUS) are significant achievements, however, the efficiency and timeliness of conducting monitoring and supervision through two disparate UoT departments is an ongoing concern. Consideration should be given to integrating offsite, onsite, and enforcement activities within a single supervisory organization. In addition, development of a more fulsome and risk based approach to Conduct of Business supervision including a broader range of supervisory practices (e.g. market analysis, offsite and onsite monitoring and thematic review) should be considered.

10. In regard to supervisory preemptive action and enforcement, consideration should be given vesting decision making authority with the insurance supervisor rather than the Minister. In addition, consideration should be given to development of a formal “ladder of intervention” commensurate with this change.

11. As part of its plans to move towards Solvency II, The Authorities should introduce a risk based capital measure which includes a greater range of risks. It should also strengthen reserving practices in line with international standards, particularly the inclusion of a MOCE and cash flow discounting. In addition, the authorities should establish a clear solvency control level as part of the capital regime below which an insurer will not be allowed to operate.

12. While consumer protection has improved in many respects, ongoing oversight of insurance intermediaries should be improved. Consideration should be given to be given to 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. In addition, fair treatment of consumers could be enhanced by establishing strong, clear rules for intermediaries regarding compensation disclosure and conflict of interest vis a vis insurance consumers. Moreover, insurer Boards should specifically be required to approve policies relating to fair treatment of consumers and to receive regular reports on their implementation (particularly with respect to complaint handling).

13. The authorities should continue to develop their framework for group-wide supervision. In addition, work to develop a macroprudential framework and crisis management and contingency plans (within the supervisory organization and in larger institutions) should also be initiated.

14. Sequencing and implementation of these 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 should be focused at increasing the efficiency of supervision without inordinately increasing administrative burden and cost. Delivery of such a plan should help to increase consumer confidence and trust in the sector and help lay a strong foundation for its future.

Assessment of Insurance Core Principles

A. Introduction and Scope

15. This assessment provides an update on significant regulatory and supervisory developments in the insurance sector of Turkey since 2011. The assessment was conducted by Charles Michael Grist, Senior Financial Sector Specialist, Finance and Markets Global Practice, the World Bank Group, from April 5 - April 24, 2016. The last formal assessment of the Turkish insurance sector was conducted in June 2011 against the Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS) in 2003.

16. The current assessment is benchmarked against the ICPs issued by the IAIS in October, 2011, including revisions authorized up until December, 2015. The assessment was undertaken as part of the Financial Sector Assessment Program (FSAP) conducted by the IMF and World Bank. The ICPs apply to all insurers, whether private or government controlled. Specific principles apply to the supervision of intermediaries. The institutional arrangements for financial sector regulation and supervision are outlined in Section C.

B. Information and Methodology Used for Assessment

17. The level of observance for each ICP reflects the assessment against its standards. Each ICP is rated in terms of the level of observance as follows:

  • a) Observed: where all the standards are observed except for those that are considered not applicable. For a standard to be considered observed, the supervisor must have the legal authority to perform its tasks and exercise this authority to a satisfactory level.

  • b) Largely observed: where only minor shortcomings exist, which do not raise any concerns about the authorities’ ability to achieve full observance.

  • c) Partly observed: where, despite progress, the shortcomings are sufficient to raise doubts about the authorities’ ability to achieve observance.

  • d) Not observed: where no substantive progress toward observance has been achieved.

18. The assessment is based solely on the laws, regulations, and other supervisory practices in place at the time of the assessment in April, 2016. While the assessmesnt does not reflect on-going regulatory initiatives, some key proposals are discussed by way of additional comments in this report. The authorities have provided a self-assessment, supported by examples of actual supervisory practices and assessments, related to entities the identities of which have not been disclosed, which enhanced the robustness of the assessmesnt. Technical discussions with, and briefings by, officials from the Turkish authorities have also enriched discussions of this report as did discussions with some industry participants. The assessor did not meet with any consumer groups. Discusions with industry participants were conducted in the presence of UoT officials.

19. The assessor is grateful to the authorities for the cooperation and thoughtful logistical arrangements, particularly the helpful coordination of various meetings with industry participants. The assessor is also grateful for the valuable inputs and insightful views received from insurers, professional associations, and other industry participants received during the course of this assessment.

C. Overview—Institutional and Macroprudential Setting

Institutional framework and arrangements:

20. Financial sector regulation in Turkey is dependent on several authorities. Each major component of the financial sector, with the exception of private pensions, is overseen by a separate agency or department of government with its own sector specific legislation. These authorities operate with considerable autonomy but powers and responsibilities overlap in some areas, particularly regarding regulation of financial groups and financial/industrial conglomerates that dominate Turkey’s financial markets. Excluding insurance and pensions, the major regulatory authorities are the Central Bank of Turkey (CBT), the Bank Regulation and Supervision Agency (BRSA), the Capital Markets Board (CMB).

21. Regulation and supervision of insurance and pensions is vested in the Undersecretary of the Treasury and is divided between two departments. The General Directorate of Insurance (GDI) is responsible for development and drafting of legislation and regulations, for off-site supervision, and certain intervention and enforcement activities. Supervision, particularly on-site supervision, is the responsibility of the Insurance Supervision Board (ISB). Both organizations use offsite information received from a common information systems platform to support their work.

22. Taken together, the GDI and the ISB have 172 employees. 66 of these are employed by the ISB while 106 are employed with the GDI. The majority of ISB staff are located in Istanbul but the head office is in Ankara. GDI staff are all located in Ankara. In general, when ISB identifies a serious problematic situation in a particular institution through off-site monitoring, onsite supervision or related activities, it will report its findings to GDI, which will then assume responsibility for dealing with the troubled institution.

23. In addition to the GDI and the ISB, under the Insurance Law 5684, Turkey has established an Insurance Agencies Executive Committee. The committee’s responsibilities include establishing professional rules for insurance agents, training activities and disciplinary activities over agent misconduct. It has a small staff of less than ten people.

24. The major pieces of legislation regulating the insurance sector, in addition to the requirements of the Commercial Code and the Code of Obligations, include the following:

  • The Insurance Law No. 5684 of 2007 and related regulations

  • The Road Traffic Act No. 2918 and regulations which regulate motor third party liability insurance

  • The Catastrophe Insurance Law No. 6305

  • Law No. 5363, the Agriculture Insurance Law

  • Civil Aviation Act No. 2920

25. All authorized insurance, reinsurance and pensions companies are required to become members of the Association of Insurance, Reinsurance, and Pension Companies of Turkey (TSB). While the TSB has no direct power over insurance companies, it engages in a number of advocacy and intermediation functions on behalf of its members. The TSB is actively involved in the development of new legislation as an industry intermediary. It also engages in research, education, and literacy improvement activities, compiles statistics on the industry and manages the Assurance Account which is described below.

26. Turkey has no general policyholder compensation scheme in the event of insurer insolvency but the Assurance Account has been established to pay certain compulsory insurance claims (e.g. those related to motor insurance and other compulsory third party liability insurances) including those related to the failure of a compulsory insurance provider. The account is funded from fees on the regulated industry. The claims on the fund must be related to:

  • personal injuries to a person where the insured cannot be identified,

  • personal injuries caused by parties who do not have the required insurance coverage at the date the risk has 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, and

  • payments within Turkey made by the Turkish Motor Insurers’ Bureau relating to foreign insurants under the Green Card Insurance Program (see below).

Industry structure and recent trends:

27. The Turkish insurance sector is a small but growing part of the country’s financial services industry. In 2015, the insurance sector comprised less than 3 percent of all financial services sector assets. Nevertheless, between 2006 and 2015, gross premiums written grew at an average annual rate of approximately 22 percent (7.4 percent at constant prices), substantially above nominal GDP growth of 11.7 percent during the same period. As a result, the insurance penetration ratio (the ratio of premiums written to GDP) has gradually increased from 1.26 percent in 2006 to 1.49 percent in 2014. The sector employs more than 58,000 people.

28. Insurance penetration remains low by international standards, however, and in combination with growing per capita income, is fueling industry expectations of long term sector growth. Insurance penetration is below that seen countries like Lebanon (2.46 percent) or Mexico (2.12 percent) that have similar per capita incomes. It is also below that seen in several countries in the region.

29. The Turkish market is dominated by the non-life sector which 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 and 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 written1.

30. 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.

31. 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 and individual term life accounts for approximately 9 percent of premiums written. All other products account for less than 10 percent of premiums written.

32. There were a total of 60 authorized insurance companies operating in Turkey during the third quarter of 20152. They include 36 non-life insurers, 19 life and pension companies, 4 pure life insurers and one locally established reinsurance company. Most of these insurers are joint stock companies but 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 has decreased from 63 in 2014 but is one greater than the 59 insurers that operated in the market 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 its business was written outside of Turkey. There are also 2 foreign branches operating in the country.

33. International participation in the industry is very strong. At least 24 non-life insurers and 15 life insurers have foreign capital participation including participation of major European and American insurance groups. Several insurers also have ownership linkages with banks. Four Islamic banks have ownership linkages with insurers and 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.

34. Insurance market concentration is low. The Herfindahl-Hirschman Index of market concentration is less than 900 for the non-life industry and less than 1200 for the life industry, indicating well diversified markets. The largest market share of any industry participant is approximately 15 percent of gross premiums written. The largest five non-life insurers account for less than 58 percent of premiums written while the largest five life insurers account for less than 70 percent of life industry assets (including pension industry assets). Both the life and non-life markets are said to be intensely competitive.

35. Insurance policies are distributed mainly through licensed agents and brokers, banks, and direct sales. Agents are the most important distribution channel and their activities account for approximately 67 percent of premiums written in 2014. Insurance brokers are especially important to commercial business and account for approximately 14 percent of premiums written. Bankassurance, which is primarily focused at lending related life products, accounts for 12 percent of premiums written while direct sales account for five percent of premiums written. All other distribution methods account for less than 2 percent of premiums written. In 2015, there were more than 16,100 licensed insurance agents and 123 insurance brokers. Since 2011, the number of insurance agents has declined by approximately 3 percent while the number of brokers has increased by almost 34 percent.

36. The market is characterized by several insurance products that are compulsory for consumers. Compliance with requirements for some compulsory products (e.g. earthquake insurance, and motor third party liability) is said to be a significant issue.

37. The market includes four significant insurance pools. The Turkish Catastrophe Insurance Pool was created after the 1999 earthquake. The program is designed to provide compulsory insurance for all urban residential properties for property damages caused directly by earthquakes and other perils of fire, explosion, tsunami, or landslide following earthquake. Responsibility for administration of the pool rests with a seven person board of directors which is largely composed of officials from several government ministries. The Technical Operator of the pool at present is Eureko Sigorta A. S. Insurance companies act as agents for the pool but bear none of the underwriting risk. If the pool is not able to transfer some of the risks to international reinsurance markets on favorable terms, then Government can provide partial reinsurance coverage to the pool.

38. The Green Card Pool was established to cover motor third part liability claims of Turkish residents travelling abroad in Europe and to handle claims of accidents in Turkey caused by foreign plated vehicles which have a valid green card. All insurers licensed to write motor third party liability insurance in Turkey are required to be members of the pool which is run by an independent board of managers in conjunction with the Turkish Motor Insurance Bureau (TMIB). Green cards are issued by local insurers and all premiums are ceded to the pool. Claims are handled by the TMIB and settlement is made in accordance with the laws of the country where the accident occurred. Members share in the profits or losses of the pool in proportion to the volume of business ceded.

39. The 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. The program is run by Milli Reinsurance S.A. All cessions are voluntary and business is retroceded back to members in proportion to the amount of business they cede.

40. The Agriculture Insurance Pool (TARSIM) provides standardized agricultural insurance cover to farmers in Turkey. The Pool is run by a special purpose company set up by the companies writing agricultural insurance business. It is overseen by a Board comprising government and industry members and a member from the Union of Turkish Chambers of Agriculture. It receives a government subsidy of a minimum 50 percent of the premiums written. Insurance companies issue insurance policies with their own name, however all of the risk and the premium must be transferred to the Agriculture Insurance Pool. These insurance companies can optionally take a share from the Pool through retrocession.

Operating Performance, Assets and Liabilities, and Solvency Position

41. The life insurance and pension industry has enjoyed high profitability in recent years but this largely appears to be the result of life business investment income rather than pension business. Premiums written have grown at an average annual rate of approximately 12 percent over the last five years but underwriting results have been negative during that period and the industry expense ratio has been increasing. Nevertheless, the after tax return on equity ranged from 17.6 to 28.7 percent between 2011 and 2015 (see Table 3) because of investment returns.

Table 1

Insurance Penetration in Selected Countries in the Region during 2014

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Source: Axco Global Statistics/GDI/SwissRe

2013 figure

Table 2

Premiums Written in 2015*

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Source: Axco Global Statistics

Preliminary Estimates

Table 3

Compulsory Insurance Products

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42. Profitability in the non-life sector has varied over the last five years and is largely impacted by the direction of motor insurance. Premiums written have grown at an average annual rate of more than 18 percent over the last five years and industry expenses have been in the 25 to 27 percent range. After several years of poor results, the non-life sector made underwriting profits in 2013 and 2014. Industry sources suggest that the improved profitability was largely due to hardening rates in the motor sector, a reduction in reserve strengthening and improved investment returns. In 2015, preliminary results suggest that the non-life sector will again incur an underwriting loss reflecting intense competition and reserves strengthening.

43. Profitability of reinsurance business has also varied considerably over the last five years. Premiums written appear to have declined from levels set in 2011 and 2012 and the expense ratio for the country’s only reinsurer ratio has increased. While the reinsurer has had a positive return on equity since 2012, it 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 (%)

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Source: ISB and GDI

Assets and liabilities:

44. Asset growth in the insurance sector has been very strong. From 2011 to 2015, total sector assets grew by approximately 117 percent from 42,473 TL mn. to 92,080 TL mn.. The growth is most significant in the life industry where assets increased by close to 136 percent. Most of this expansion is due to expansion of pensions business, which has been stimulated by tax concessions, and more recently, state contributions towards private pension plans. The non-life sector has also grown significantly. Between 2011 and 2015, total non-life assets grew by almost 94 percent. This growth reflects general premium growth and increased holdings of technical reserves by insurers.

45. The investment profile for both life and non-life insurers appears to be conservative and strongly weighted towards government securities. 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. The composition of investments between major classes also appears to have been relatively constant over the last five years. In regard to liabilities, technical provisions appear to have grown faster than total liabilities for both life and non-life business but not for reinsurance business.

Solvency Position:

46. Table 5 illustrates that for the life and reinsurance industries in Turkey, the solvency position of the industry has remained relatively constant over the last three years while the solvency position of the non-life industry has declined. In Turkey the solvency capital requirement is the higher of two methods of calculation. The first method is a Solvency I style of calculation that is based on the higher of a premium income based calculation or a claims experience based calculation. The second method is a risk based method that considers a range of risks valued against predetermined factors set out in regulation.

Table 5:

Industry Assets and Liabilities

(In TL millions)

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Source: ISB
Table 6

Solvency Assets Available Over Required

(End-Period)

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Source: ISB and GDI

First six months

47. The number of insurers subject to intervention has also 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 of these were non-life companies and one was a life insurance company.

Risks and Vulnerabilities:

48. The continued growth and stability of the insurance sector is dependent 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 on general financial and economic stability and the sector outlook. To some extent, these can be mitigated by effective consolidated supervision and stress testing. The authorities are aware of these issues and are working to minimize their potential impacts.

49. The Turkish insurance market is intensely competitive and there are a large number of insurers for the size of market. Fierce competition among insurers on price, rather than on quality of service, is resulting in the erosion of underwriting discipline and could create solvency problems. This is particularly true for smaller insurers. Hard price competition is especially 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.

50. A continued low interest rate environment may impact on consumer demand for some new life insurance products though low interest rates stimulate the demand for credit insurance associated with lending. Moreover, limited availability of long term financial instruments makes it difficult for insurance and pensions companies to overcome asset liability matching problems. The UoT is working on issuing long term bonds to help mitigate the matching problem. Finding other ways to improve the growth and increase the depth of capital markets would also help. Increasing access to insurance in underserved parts of the population through products designed to meet local needs may help increase the demand for life insurance.

51. The exposure to natural disasters in the region is an important but well recognized challenge for the insurance sector. 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 some catastrophic risks related to urban residential structures.

52. Turkey has, in the past, 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 are factors that could impact on the insurance industry.

D. Preconditions for Effective Insurance Supervision

Sound and Sustainable Macroeconomic and Financial Sector Policies:

53. Turkey was ranked 45th in global competiveness by the World Economic Forum (WEF)3. Some of the positive factors discussed in the assessment included quality of overall infrastructure, health and primary education, goods market efficiency, and market size. The top three problematic factors indicated by the forum were inefficient government bureaucracy, policy instability, and a lack of workforce education.

54. With a Gross Domestic Product (GDP) of $719.97 billion (US), Turkey was the world’s 17th largest economy in 2015. From 2001 until 2008, it experienced strong economic growth, averaging real GDP growth of close to 6% per annum. Global economic conditions and tighter fiscal policy caused GDP to contract in 2009, but the economy rebounded strongly and real growth rates of 9.2 percent and 8.8 percent were experienced in 2011 and 2012, respectively. Since 2012 growth has moderated. After growing 4.2 percent in 2013, the economy slowed to 2.9 percent in 2014. Real growth in 2015 is expected to have been in the 4 percent range which is high relative to most EU countries and other countries in the region.

55. Turkey’s economy is increasingly driven by its industry and service sectors, although its traditional agriculture sector still accounts for about 25% of employment. The country has a relatively young population and per capita income has grown markedly during the last 10 years, currently exceeding $10,600 (US) per person. Despite mounting geopolitical threats in both the region and the country’s southeastern corner, Turkey’s economy is expected to benefit from strong government support, low oil prices, and a weaker lira in the immediate future.

56. Although it is not a member of the European Union (EU), Turkey is moving towards harmonization of laws with EU laws. In insurance, the regulatory and supervisory authorities are looking at harmonizing major prudential requirements with the EU’s Solvency II requirements.

Turkish Legal System:

57. Turkey’s system of laws is well developed but the court system is not easily accessible to individual insurance consumers. Court costs and legal fees are high relative to the incomes of many consumers and a judgement from the courts can take several years to obtain. In the past, there was a low level of claims consciousness and a reluctance to take legal action by many consumers in Turkey However, insurers indicate that, more recently, there has been an increase in litigiousness of consumers. Nevertheless, relatively few insurance claims cases make it to the courts.

58. Although there is no financial sector ombudsman in Turkey, an Insurance Arbitration Commission (IAC) was established by Article 30 of the Insurance Law No 5684 in 2007. The IAC settles contract disputes arising between policyholders or people benefiting from the insurance contract one hand and the insurer on the other. It is voluntary for insurance companies to join the scheme butfor the compulsory insurance products all insurance companies can be engaged in the arbitration process even if they are not a member. . The IAC deals with disputes associated with all types of insurance products without value limitation. The cases are entrusted to an expert, duly registered with and approved by the IAC, who examines the circumstances of the case and reaches a decision that is 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 also be appealed to the courts system.

59. More generally, 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.

60. 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:

61. 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.

62. Turkey has a growing actuarial community. There are approximately 127 actuaries currently licensed with the UoT and there is also a well-established actuarial professional association.

63. Table 6 summarizes the observance of the ICPs arising from this assessment.

Table 6.

Turkey: Summary of Observance with the ICPs

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64. Table 7 provides a summary of the level of observance.

Table 7.

Turkey: Summary of Observance Level

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65. Table 8 lists the suggested steps for improvement of the level of observance. Some of these actions reflect actions that are already in progress but yet to be fully operational.

Table 8.

Turkey: Recommendations to Improve Observance of ICPs

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Detailed Principle-By-Principle Assessment

Table 9.

Turkey: Detailed Assessment of Observance of the ICPs

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