Permitted Operations of Foreign Reinsurers in Turkiye Without the Requirement of Local Licensing

Introduction

According to Article 3 of the Turkish Insurance Code (“Insurance Code”), insurance and reinsurance companies operating in Türkiye must be established as either joint stock company or cooperative as per Turkish Commercial Code (“TCC”) and be registered and licensed in Türkiye.

However, Turkish legislator allowed the operations of foreign reinsurers that do not have a presence in Türkiye subject to certain rules.

Turkish insurance regulator, the Insurance and Private Pension Regulation and Supervision Agency (“SEDDK”) is the authority to supervise the implementation of these operations and non-compliance with these Turkish local rules can result in (i) criminal penalties, (ii) administrative sanctions, and (iii) civil litigation.

This article aims to provide an overview of the applicable Turkish legislation for foreign reinsurers that do not have a direct presence in Türkiye.

High-level Description of Turkish Regulatory Insurance Framework

According to Article 3 of the Presidential Decree on Insurance and Private Pension Funds Regulation and Supervision (“SEDDK Decree”), SEDDK is the authority to independently fulfil and exercise the duties and powers assigned to it as an independent insurance regulator.

Specifically, the decisions of the Authority shall not be subject to an audit of propriety. No individual, authority, authority or person may give orders and instructions to influence the decisions of the Authority.

The decisions of SEDDK are administrative actions and subject to administrative litigation as per Article 125 of the Turkish Constitution.

According to Article 3 of the SEDDK Decree, the duties and powers of the SEDDK are as follows:

1- To carry out the duties and authorities related to insurance and private pensions as stipulated in the Road Traffic Law, Private Pension Savings and Investment System Law, Agricultural Insurance Law, Insurance Code, TCC and other legislation,

2- To prepare and implement the legislation on insurance and private pensions, and to monitor and guide its implementation by those concerned,

3- To take measures for the development of insurance and private pension practices in the country and for the protection of the insured and participants, to implement these measures itself or to have them implemented by the relevant institutions and to monitor their implementation,

4- To carry out examinations, audits and investigations regarding individuals, and organizations operating in the field of insurance and private pensions,

5- To prepare consolidated reports on insurance, private pension and other related financial markets by examining and taking into consideration the developments occurring in Türkiye and abroad in order to contribute to the formation of decisions to be taken on insurance, private pension and other related financial markets, to participate in studies on these issues and to give opinions, to examine and evaluate the information, documents and papers received, compiled and submitted to it and the results obtained from audits and monitoring,

6- To conduct, carry out and give opinions on all kinds of research and other studies related to the legislation and practice related to its field of duty.

To summarize, SEDDK is the Turkish authority that is obliged to monitor the activities of the re/insurers operating in Türkiye.

Exceptions

Due to localization governance that is the basis of the applicable above-mentioned Article 3 of the Insurance Code, insurance and reinsurance companies operating in Türkiye must be established as either joint stock company or cooperative per TCC and be registered and licensed in Türkiye.

However, (i) non-admitted regime and (ii) reverse solicitation are the primary exceptions of Turkish localization rules. Below you may find the relevant information for both exceptions:

Exception 1: Non-Admitted Regime

According to the Turkish Cabinet Decision on International Activities on Insurance Industry no. 2007/12467 (the “Cabinet Decision”), foreign reinsurance companies can operate in Türkiye only through opening a branch.

However, the term “operate” under the said Cabinet decision was not clear and therefore the Turkish Treasury, the direct regulator back in 2007, issued a circular no 2007/5 and dated 27.08.2007 on the same Cabinet Decision, which specifically states that “the term operational means presenting reinsurance products, making advertisements and marketing activities such as advertisements, commercials, etc. within the country borders of Türkiye.

Therefore, Turkish ceding insurers can secure contractual reinsurance from a foreign reinsurer as engaging through a contract does not mean being operational in Türkiye.

In accordance with the above stated, foreign reinsurers who do not prefer to set up a local reinsurer licensed by the SEDDK can underwrite reinsurance risks on a non-admitted basis without a license through duly fronting with a Turkish licensed insurer.

To sum up, under the non-admitted regime, the contract that the foreign reinsurers is a party to does not qualified as an insurance contract (but will be considered under scope of the freedom of contract) nor an insurance activity within the country borders of Türkiye and therefore the foreign reinsurer will not be defined as an insurance company, but be defined as a foreign reinsurance company per Turkish law.

There is a very thin line between what the direct marketing activity and presentation of reinsurance products stands for and foreign reinsurers are advised to discuss with a qualified insurance specialist lawyers before entrance to Turkish market.

Exception 2: Reverse Solicitation for Limited Insurance Types

In principle, Turkish residents (habitual or temporary) are obliged to have their insurable interests in Türkiye insured by insurance companies operating in Türkiye as per Article 15 of the Turkish Insurance Code. We refer to the above section for the detailed discussion on the term “operating”.

However, certain exceptions apply to this general rule. According to Article 15/2 of the following limited number of insurance products can be directly purchased from overseas insurers without having a presence in Türkiye:

1- Transportation insurance for export and import goods

2- Hull insurance for airplanes, ships, helicopters (through external loans or leasing from abroad)

3- Liability insurance for the operation of ships

4- Life insurance

5- Personal accident, sickness, health and motor vehicle insurances that can be taken out individuals

6- Nuclear liability insurance

7- Liability insurance to be established for clinical trials of medicinal products for human use

Furthermore, as per Article 15/3 of the Insurance Code, Turkish president has the authority to expand this limited number of exceptions.

However, Turkish localization governance principle is also the basis of the applicable Article 15 and to clarify certain restrictions, Turkish Treasury, the direct regulator back in 2011, issued a circular to set out the relevant restrictions.

According to the Circular on the Implementation of Overseas Insurance Exemptions (Article 15) (“Exemption Circular”), the following activities of the foreign reinsurers are strictly regulated for exceptions of the Turkish localization governance principles:

1- Direct sales and marketing activities in Türkiye without any direct proposal from the policyholders for life insurance products.

2- An insurance intermediary operating in Türkiye cannot act as an intermediary for the sale or marketing of insurance products of foreign insurance companies for life insurance products.

Similar to non-admitted regime rules, direct sales and marketing activities is the redline of Turkish sanctions.

Conclusion

In line with the above, the direct sales and marketing activities based on which party to secure product proposal and by whom again creates a redline between permitted legal reinsurance operations and very serious sanctions.

Furthermore, given that insurance is a product that is predominantly offered by insurance intermediaries globally, a restricted action of a third-party broker can put the foreign reinsurer and its officers/directors in very unexpected legal problems.

Therefore, foreign reinsurers are advised to discuss with a Turkish qualified insurance specialist lawyers before entrance to Turkish market through exempted products as per Article 15 of the Insurance Code.