ESTABLISHMENT AND SUPERVISION PROCEDURES OF INSURANCE COMPANIES
Before examining the establishment of insurance companies, it is useful to briefly understand what insurance is. Insurance policies enable individuals and institutions to secure their assets and compensate for damages they incur. In this context, individuals who share common risks (unexpected situations, dangers, or damages) contribute premiums proportional to the value they wish to insure, creating a collective pool. Consequently, when a risk materializes, the affected person has the right to claim compensation from this common pool.
Thus, risks that could cause significant financial consequences are mitigated without imposing a burden on society. As mentioned above, the premium to be paid must be proportional to the risk to ensure proper compensation. In other words, the higher the risk or the greater the danger, the higher the premium must be.
Establishment of Insurance Companies and Related Restrictions
The establishment of insurance companies is regulated by law worldwide. Different countries implement various supervisory systems in this regard. In our country, the method applied is the insurance supervision system in which the state exercises the most intervention. Within this framework, the state imposes restrictions on companies, activities, and business lines, sets the general framework of contract provisions, and subjects companies to various licensing and authorization requirements. Furthermore, the state also supervises insurance companies through various oversight mechanisms during the termination of their operations.
1. Company Type Restriction
According to Article 3, Paragraph 1 of the Insurance Law No. 5684:
"Insurance companies and reinsurance companies operating in Turkey must be established as joint-stock companies or cooperatives."
From this provision, it follows that insurance companies must be organized in compliance with both the Turkish Commercial Code and the Insurance Law to operate as joint-stock companies. The primary reason for requiring the joint-stock company structure is undoubtedly capital adequacy. In this regard, joint-stock companies are deemed to have sufficient capital to conduct insurance activities. However, it is not sufficient for insurance companies to be organized in accordance with the law; they must also obtain an establishment permit from the Ministry of Trade in accordance with the Regulation on the Increase of the Minimum Capital Amounts of Joint-Stock and Limited Companies and the Identification of Joint-Stock Companies Subject to Establishment and Articles of Association Amendments.
Insurance companies established as cooperatives, on the other hand, operate by forming a pool through the membership fees paid by at least 200 members. According to Article 1402 of the Turkish Commercial Code, insurance activities carried out by cooperatives are referred to as mutual insurance. Such cooperative companies that do not enter into insurance contracts with individuals outside their membership are also required not to grant any special privileges to their executives. However, if cooperative companies wish to enter into insurance contracts with individuals outside their membership, they must obtain permission from the SEDD (the authority designated by Presidential Decree No. 47) and increase their capital to the amount determined by the institution. Additionally, insurance and reinsurance companies are subject to various conditions regarding their organization and founders.
Conditions Required for the Founders of Insurance and Reinsurance Companies Established as Joint-Stock Companies:
Must not be bankrupt or have declared concordat.
Must possess the financial strength and reputation required to be a founder or partner of an insurance or reinsurance company.
Must not hold shares granting voting rights or management and control privileges in financial institutions subjected to liquidation or companies subjected to the provisions of Article 20, Paragraphs 2 and 3.
Must not have been convicted of any crime, excluding negligent offenses, regardless of pardon, involving imprisonment for a definite period, multiple judicial fines, or violations of insurance legislation. Additionally, must not have been convicted of embezzlement, bribery, theft, fraud, forgery, breach of trust, fraudulent bankruptcy, abuse of authority, smuggling, bid rigging, laundering proceeds of crime, financing of terrorism, disclosure of state secrets, or tax evasion.
If a legal entity, its executives and controllers must meet the requirements applicable to individual founders, except for financial strength.
Furthermore, according to Article 5 of the Insurance Law, general managers and deputy general managers, board members, executive members, auditors, and majority shareholders must meet the same criteria as founders. Additionally, various qualification requirements are specified for certain positions in the same article.
2. Activity Type Restriction
Insurance companies are prohibited from engaging in businesses other than insurance or insurance-related activities. This restriction is designed to prevent insurance companies from diverting their capital to other sectors. However, this restriction should not be confused with the companies' ability to make investments or manage their capital. Moreover, this prohibition also applies to holding structures where separate entities operate under a single umbrella. It is permissible for an insurance company to be a dominant shareholder in another company. For example, banks cannot engage in insurance activities, but they can be the majority shareholders of an insurance company.
3. Branch Restriction
According to Article 5, Paragraph 2 of the Insurance Law:
"Insurance companies may operate in only one of the two insurance groups: life insurance or non-life insurance."
To better understand this restriction, it is essential to differentiate between life and non-life insurance. Life insurance provides financial protection for the insured's dependents in case of disability, death, or illness. Unlike non-life insurance, life insurance does not compensate for damages but rather guarantees a payout upon the occurrence of the risk defined in the contract.
Non-life insurance, on the other hand, covers financial losses resulting from unforeseen risks affecting the insured or their assets. In this case, compensation is paid for the damages incurred. The specific branches within these categories are determined by the SEDD. The primary reason for this restriction is that life and non-life insurance are subject to different regulatory requirements and are not suitable for combined operations. In practice, some companies establish separate insurance entities to operate in both sectors.
Gaining the Authority to Enter into Contracts as a Legally Organized Company
Merely being organized in compliance with the law does not entitle an insurance company to enter into insurance contracts. To gain this authority, the company must first obtain a license from the SEDD. Specifically:
"Insurance companies and reinsurance companies that fail to apply for a license within one year from the completion of their establishment procedures may not use the terms 'insurance company' or 'reinsurance company' in their trade name."
If a company fails to apply for a license within one year of its establishment, it cannot qualify as an insurance or reinsurance company and therefore cannot enter into insurance contracts. According to Article 6 of the Insurance Law, a license application may be rejected if any of the following conditions exist:
a) The founders, executives, or auditors of the insurance or reinsurance company fail to meet the conditions set forth in this law.
b) The business plan or submitted documents indicate inadequate protection of policyholders' rights and interests or an inability to continuously and sufficiently fulfill obligations.
c) The application lacks sufficient declarations and information or does not meet the conditions set forth in this law.
d) The company lacks the necessary technical infrastructure, a sufficient number of qualified personnel, or the capability to engage in insurance activities in the requested area, as determined through inspections.
Conclusion
In conclusion, if any of the conditions required for license issuance are lost or if deficiencies specified by law are not rectified, the company's license may be revoked. In such cases, seeking professional legal support is crucial to mitigating the adverse effects on both policyholders and insurance companies.
