Challenges Encountered When Making Insurance Laws and Regulations with Examples from Türkiye and the World

In a country, the administrative structure of the state, legal system, market structure, economic policies adopted by the governments and the scope of the social security system, the number and types of insurance and pension companies, their size (in terms of capital, number of clients, market shares), specialization and some other factors affect legal rules and regulations related to the insurance and private pension sectors.

?In almost all developed and developing countries in the world, states, based on their own constitutions and laws, regulate financial markets, and the financial institutions and organizations operating in these markets, their shareholders, managers and employees, and their intermediaries. Their activities are subject to strict legal regulation and control. This is because; possible financial losses and damages that may arise as a result of misconduct by any organization or person operating in the financial markets, sometimes affect not only the relevant financial institution and its shareholders, managers, employees and customers, but also those operating in almost all sectors of the relevant country's economy, and sometimes even the entire world economy. In that case financial institutions and organizations and hundreds of thousands or even millions of people who are their customers may suffer loss of rights and interests, and damage.

One of the recent examples of this was the global financial crisis that broke out in 2008, with the bankruptcy of Lehman Brothers and many other large financial institutions in the United States, and then it quickly spread to other countries. The crisis broke out due to the problems encountered in the repayment of housing loans with variable interest rates as a result of the careless housing loans given to people with low repayment capacity in the low interest rate environment. This firstly caused high increases in house prices, and then a huge debt crisis and collapse of financial institutions, when the American Central Bank FED increased the interest rates.?

As a negative example from the insurance industry; We can talk about the demise of the Equitable Life insurance company. Equitable Life Insurance company, one of the oldest life insurance companies in the world, founded in the United Kingdom in 1762, sold deferred “guaranteed annuity contracts” providing deferred payments with a guaranteed rate of return to approximately 1 million customers who saved with the "Equitable Life Private Pension Contract" in the period between 1957 and 1988. However, since the nominal interest rate in the market was relatively high in the years when these guaranteed rates of return were given, the company did not set aside any insurance technical reserves in advance in order to cover the cost of these guarantees, and it did not try to terminate the contracts by offering advance compensation payment, and it did not conclude any reinsurance agreement to safeguard itself. Or it did not take any additional measures by any other method or practice. But, as the interest rate of return in the market decreased in the 1990s, the company became unable to fulfil its financial obligations arising from the deferred life annuity contracts with the guaranteed rate of return, and eventually it ceased its activities and went into bankruptcy and liquidation process as of 2001 (www.actuaries.org. uk).

In many countries of the world, public authorities and some international organizations (For example, “the International Association of Insurance Supervisors") aim to prevent misconduct and financial crimes, to regulate the markets, to establish stability and trust in the markets, and they try to protect individual and institutional investors. In this context, the Insurance Law, Private Pension Savings and Investment System Law and other private insurance legislation in Türkiye have been designed and put into effect to protect the public interest. However, due to the following facts, situations, conditions and various similar reasons, it is observed that in Türkiye, as in many other countries, there are difficulties and problems in the implementation of both general legal rules and regulations and private insurance law from time to time.

Lack of or deficiency of the rules and regulations

Lack of legal regulations in the legislation, or despite the existence of legal regulations, there are some gaps in them, or insufficient sanctions in case of non-compliance can lead to irregularities and sometimes to the formation of a disorderly environment. The most striking example of this in Türkiye was the banker disaster resulted in the demise of approximately 250 bankers in 1981, victimizing nearly 250,000 depositors, as the state could not carry out adequate regulation and supervision. To give an example from the insurance sector in Turkiye; for example, there are currently no “Disability Insurance General Conditions”.

Design

When we hear the word ‘regulations’ most of us think of concepts such as difficult to understand, strict rules, harsh sanctions, and heavy penalties come to our mind. This is generally a correct understanding. In order to get people to do or not do something, we can provide them with various financial rewards and incentives, and impose bans, sanctions and financial and/or freedom-limiting penalties. However, the most effective method of convincing people to do or not do something is to direct them to certain behaviors by activating their emotions and passions.

According to the "Nudge" theory, developed by Richard Thaler through his studies combining psychological assumptions with economic decision-making analyses (which earned him the Nobel Prize in Economics in 2017) and used in behavioral sciences, economics and political theory: Decision processes of the individuals or groups can be influenced by indirect advice and positive behavioral incentives to encourage compliant behavior, without giving instructions, using force or legal punishment (Thaler and Sunstein, 2013). In this context, it is of great benefit for? regulatory authorities to take this issue into consideration at the design stage when rulemaking. Thus, legislation can be developed and implemented in a way that everyone affected by the relevant regulation can read, understand, absorb and apply it more easily.

Consistency?

Sometimes, it is seen that different understandings and approaches are adopted in written legal rules containing terms and conditions, regulating the same or similar subjects or similar activities of the same people, and sometimes the same concepts are defined in different ways from different perspectives. Some laws are completely repealed, provided that one or more articles are kept reserved. Difficulties arise in identifying the repealed legislation, mostly due to its wording. For example; “Provisions of other laws contrary to this law have been repealed.” or such as in this sentence “Provisions in other laws that are not contrary to this law continue to be applied.” General and vague terms and conditions in the form that do not comply with the legislative technique and cause hesitations and different interpretations in practice are included in the wordings of some rules and regulations. (Din?kol, 2012).

For example; According to the Inheritance and Gift Tax Law in Türkiye, in case of the accidental death of the insured within the scope of personal accident insurance, the benefit amount payment by the insurance company based on the insurance contract is intended to partially compensate and make up for the material damage and moral suffering that the relatives of the insured person will suffer due to the absence of the insured. Therefore it is not taxed within the scope of the Inheritance and Gift Tax. On the other hand, death benefit payments made by the insurance company to the heirs of the insured as a result of the natural death of the insured, based on a life insurance policy that essentially has the same purpose, are included in the estate and are subject to the Inheritance and Gift Tax.

Global integration and universality

Today, with the contribution of the rapid development in science and technology, production, consumption, distribution and sharing methods are changing all over the world in a way that reshapes existing economic activities and systems. International trade is developing, and movements of goods, services, labour and capital are increasing. Global integration, as a constantly evolving phenomenon that emerges under these conditions, on the one hand creates an advanced level of economic interdependence between local markets and countries, and on the other hand, increases competition from the national market level to the international level. It is seen that some countries have improved their competitive conditions and increased their productivity and efficiency with the foreign capital investments they received thanks to international trade and global integration. It is observed that the insurance, reinsurance and private pension sectors, which are the most important and largest players in the non-bank financial sector, are not left out of these developments. Under these conditions, new opportunities, threats and risks constantly emerge according to the new business and partnership models.

The effects of these changes and trends on the regulation of insurance, reinsurance and private pension sectors, regulating the companies' own activities, organizations and relations between each other and their customers, as well as with new products and services (that provide insurance coverage against information and personal/corporate data security risks, cyber-attack risks, political risks and other risks) require new or additional standards, norms and legal regulations comprising relevant national and international regulations. This change does not completely eliminate local and national legal systems (as seen, for example, in the European Union acquis), but new general and universal norms reduce the differences between various legal systems and increase the similarities.

When we look at the data on the insurance, reinsurance and private pension sectors in Türkiye, we see that, according to various criteria, roughly more than half of the insurance companies operating in Turkey today are subsidiaries or affiliates of large foreign-capitalized and international insurance groups. For this reason, we can say that the insurance legislation in Türkiye is generally close to international standards (IFRS; International Financial Reporting Standards, Solvency II, etc.) and is quite compatible with the EU acquis within the scope of the EU membership process. Besides, there are still some requirements for development and improvement in the existing legislation on some issues. For example; the legislation in Turkiye regarding Takaful is quite limited, when compared to the standards of the international Islamic Financial Services Board (IFSB)regarding Takaful institutions and the International Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).

Terminology and use of common language

Today, even some of our basic laws in Türkiye have become linguistically obsolete and very difficult to understand. Moreover, language confusion continued in different periods and according to the authority that proposed or changed the legal regulation. For this reason, and especially for the legalization efforts accelerated by the European Union harmonization process, today's Turkish has been included in some basic laws. In this context, comprehensive constitutional and legal reforms have taken place in Türkiye in recent years. Laws such as the Turkish Commercial Code, the Turkish Civil Code, the Turkish Penal Code, and the Code of Civil Procedure, which are the most basic laws of daily life, have been completely renewed and made suitable for today's conditions (Anayurt, 2017; Din?kol, 2012). Despite this, in some laws and legal regulation texts, it is seen that both new and old terms and words are used at the same time, some concepts and definitions may have different meanings due to the language used in writing, and may cause different understandings and contradictory interpretations even by experts in the field.

Rulemaking technique

In recent years, it has been observed that a legal writing technique called "the bag? law" has become increasingly widespread in Türkiye, and many amendments to the existing separate laws or some new rules that do not have any unity of subject or purpose are put into a single “bag”. These “bag laws” often bear the title "Law on Amendments to Various Laws", so it seems that the names of many laws do not cover the subject of the law. This situation negatively affects individuals' ability to have sufficient knowledge about the content of the legislation (Anayurt, 2017; Din?kol, 2012). Sometimes it is seen that the issues that should be regulated by a law are regulated by a regulation instead, and the issues that should be the subject of a regulation are regulated by a law instead.

Conciseness

Sometimes it is observed that laws and the secondary legislation and regulations are written in more detail and length than necessary, narrowing the field of action of the practitioners, increasing the number of operational transactions in practice and making them more difficult, thus causing the additional operational transaction costs of the practitioners to increase.

Timing

In Türkiye, it is observed that some laws and secondary legislation related to insurance and private pension are from time to time briefly discussed and accepted by the legislature, by the legal regulatory and supervisory institutions, without discussing the legal regulation issue in sufficient detail with the relevant parties and practitioners, so to speak, in a rush. This situation may lead to subsequent review and amendment of the law and its secondary regulations, confusion due to uncertainties in practice, and ultimately loss of time, effort and money. Sometimes, delays in legal regulations can cause similar losses.

Short-Termism

Short-termism can be defined as focusing on and prioritizing short-term jobs, projects, and legal regulations for short-term gains, at the expense of giving up long-term gains, interests, and security. This is a phenomenon that we unfortunately encounter from time to time, both at the individual and institutional levels, in the private sector and in the public administration, due to various social, economic and political priorities and justifications.

Synchronization and/or concurrence

In recent years, there has been a rapid change in legislation in Türkiye for various reasons (requirements arising from environmental, economic, administrative, political, social, technological, etc. changes). This situation may sometimes lead to legislative incompatibilities, as simultaneous action cannot be taken on some issues. For example; The new Turkish Code of Obligations and the new Turkish Commercial Code, which came into force on July 1, 2012, brought comprehensive new legal regulations regarding insurance activities. In this context, in accordance with Article 11 of the Insurance Law No. 5684, titled Insurance Contracts, the general conditions of insurance had to be updated and published simultaneously in 2012 by the Undersecretariat of Treasury, which was the legal regulatory body for insurance at that time, in compliance with the new laws. However, for example; “General Conditions of Life Insurance” was updated and published by the Insurance and Private Pension and Supervision Agency approximately 10 years after the changes in the law in question and entered into force on June 1, 2022. For example; the updated "Personal Accident Insurance General Conditions" according to the new Turkish Code of Obligations and the Turkish Commercial Code have not yet been published as at the end of November 2023.

Ethical principles

Would you sell an insurance product to your customers that you would not purchase yourself as an insurance customer, or would not recommend to a family member? Would you carry out an insurance practice of a rival insurance company even though you knew it was wrong? Do you occasionally provide secret benefits to some of your clients? Could you have ignored an irregularity that you noticed in the institution you work for, for any reason? So, are all paths to success permissible?

As the questions above indicate, in some cases, the law may have been acted upon in accordance with the legal regulations or by taking refuge in some legislative gaps. However, such behavior is not always morally correct. For this reason, as in every profession, it is extremely important and necessary to act in accordance with the rules of morality and ethical principles in addition to acting in accordance with the applicable legal regulations in the insurance profession. The Association of Insurance, Reinsurance and Pension Companies of Türkiye, determined and published the Insurance Ethical Principles to further increase the existing public trust in the sector within the framework of these principles in 2007.?

However,? it is seen and heard from time to time in the sector, that some individual or corporate sector members do not act in accordance with the insurance ethical principles in question, and are sometimes punished with various administrative and judicial penalties for this reason.

We can predict that accountability to legal regulatory and supervisory bodies, reporting and consumer-oriented corporate governance will gain more importance for insurers in the coming years, as they do today. In the coming years, insurers will focus on the mobile devices used by their customers, social media applications, wearable technologies, big data, and especially in life, health and sickness insurance, gene scanning with the consent of the insured, etc. They will have the opportunity to evaluate the detailed personal data they obtain from medical examinations and tests using artificial intelligence-supported predictive analytical methods. In this way, insurers will be able to improve customer experiences and offer personalized, usage-based and more affordable insurance products and services by improving underwriting, pricing and insurance claim evaluation and claims processes. However, compliance and audit risks will increase, especially regarding issues such as the privacy, preservation, security and protection of customers' personal data against cyber-attacks and their appropriate use. As regulatory and audit risks in insurance and private pension companies increase, company managements will need to develop and implement more effective and robust oversight, internal control, legal compliance and enterprise risk management systems and standards in an increasingly complex environment.

As insurance technologies (InsurTech) initiatives and technological developments in financial services focus more strongly on improving customer experience with innovative insurance products and services; Instead of the same, uniform products and services for everyone, customers will have the opportunity to receive custom-made insurance products and services that are designed according to their own personal risk profiles, personalized, variable according to time and use, and flexible in structure. These developments have started to affect the marketing, sales, underwriting, pricing, claims assessment and payment and other business processes of insurance and private pension companies and, in parallel, the existing legal regulations, audit and monitoring rules, standards, methods and regulations. This will require radical changes in practice.

Efforts to ensure equivalence between national and international insurance legislation in terms of content, scope, calculation and reporting rules and standards will accelerate in the coming years. Currently, at the international level, there are four “Insurance Core Principles (ICPs)” adopted and published by the International Association of Insurance Supervisors (IAIS), devoted specifically to statutory auditing and corporate governance. These principles relate to general corporate governance, suitability of company managers and key people with their duties, risk management and internal controls and public disclosure. IAIS members, including Türkiye, are expected to implement these requirements in their legal audit frameworks. Compliance of the national insurance regulatory and supervisory institutions of the member countries with these principles will be regularly reviewed and evaluated according to these expectations.

In the 21st century, natural disasters and deteriorating climate conditions due to global warming,? which have increased in number and severity due to population growth, decrease in natural resources, have begun to negatively affect all business processes and social life and cause global-scale problems all over the world. In this context, environmental, social and corporate governance (ESG) risks appear to be increasing. In order to solve these global-scale problems, national legal regulations, regulatory and supervisory institutions and organizations are seen to be inadequate from time to time. And there is a need to strengthen existing international institutions and create new institutions and universal legal regulations and their effective implementation. Besides, rapid change in technology and digital transformation transcend national borders between states and nations and reinforce universal connectivity and dependency. It is inevitable that all these developments will affect the insurance sector, which plays an active role in managing environmental, social and corporate governance (ESG) risks, and national and international legal regulations regarding insurance. In order for the insurance sector in Türkiye and neighboring countries to develop in a healthy way and take an active role in this great change and transformation, and reach the place it deserves on a global scale, it is extremely important to work in harmony and cooperation with the above-mentioned international institutions and organizations and rules of universal law.

You can contact me for further details. Our team at?SHAW International?undertakes the various consultancy and technical services for our clients to meet their diverse needs.

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References

[1] Dü?ündere, A?k?n,? et al. as? co-author and ?edited by Meral, Hasan (2023). 21. Yüzy?lda Türk S?gorta Sekt?rüne 21 Tavsiye (21 Recommendations to the Turkish Insurance Industry in the 21st Century), Ankara: Atlas Akademik Bas?m Yay?n Da??t?m Tic. Ltd. ?ti

[2] Anayurt, ?mer (2017). Introduction to Law and Basic Concepts of Law Updated According to the 2017 Constitutional Amendments. Ankara: Se?kin Yay?nc?l?k Sanayi ve Ticaret A?.

[3] Din?kol, Abdullah (2012). Introduction to Law, Basic Concepts of Law. Istanbul: Der Publications

4] ünan, Samim (2017). Turkish Commercial Code Commentary Sixth Book: Insurance Law Volume III Second Part Special Provisions Regarding Insurance Types. Istanbul: Oniki Levha Publishing Inc.

[5] Schwab, Klaus (2017). The Fourth Industrial Revolution: Portfolio Penguin – Clays Ltd, St Ives plc

[6] Thaler, R. and Sunstein, C. (2009). Nudge. Great Britain: Penguin Books

[7] www.actuaries.org.uk: Extreme Events Part2 Financial Catastrophes The Overthrow of Modern Financial Theory

[8] www.iaisweb.org