This content is from: Local Insights

The insurance activities of banks

Gökhan EraksoyTugçe Ugurlu

The Draft Communiqué on Insurance Agents continues to be the subject of controversy in the insurance sector as it introduces important new rules designed to increase the level of regulation of insurance agents. In view of this objective, registration of insurance agents in the records kept by the Union of Chambers and Commodity Exchanges of Turkey (where the insurance agents active in specific sectors are listed) becomes a precondition of operating as an insurance agent and entering into agency agreements with insurance companies.

So far, the discussions on the Draft Communiqué among legal experts – together with public commentary – reveal that insurance agents' main concern is not institutionalisation in itself, but rather the control and supervision of banks in providing insurance services.

This concern is not unjustified. As more and more banks enter the insurance business, a considerable risk arises that the line between banks and insurance agencies may become so blurred that it disappears altogether. Turkey needs a clear set of rules and norms that explains the legal and regulatory limits of banks involved in insurance sales.

The established practice in Turkey is for banks to offer their customers insurance services that are based generally on credit life and personal accident insurance. Insurance agents' complaints centre on the fact that banks abuse their lending power by forcing customers to accept the terms and conditions of the insurance policies that are automatically offered with the loan.

In other words, consumers are denied the opportunity to search for and buy policies from independent insurance companies or agents (insurance companies/agents that have no connection to banks), and insurance agents thus claim that – with regard to competing in the market – they are at a clear disadvantage compared with the banks.

The Draft Communiqué aims to create a balance between insurance agents and banks by introducing new rules on banks' insurance activities. As opposed to the Communiqué on Insurance Agents already in force, the Draft Communiqué regulates for the first time the type of agency services that banks may provide. According to Article 29/2 of the Draft Communiqué, banks may act as insurance agents on the condition that they provide insurance services relating only to compulsory insurance, as determined by the Council of Ministers pursuant to Article 13 of the Insurance Law (earthquake insurance, for example), credit life insurance, personal accident insurance and state-sponsored agricultural insurance.

The provision also stipulates that products relating to credit life and personal accident insurance to be sold by insurance companies through banks are subject to the Undersecretariat of the Treasury's approval. Considering the fact that, in Turkey, credit life and personal accident insurance are mostly provided by banks, it would be fair to assert that this regulation is intended to control the insurance services offered by banks.

Another important regulation with respect to banks' insurance activities under the Draft Communiqué is Article 29/3, requiring banks to establish a separate commercial enterprise to engage in insurance activities if they wish to provide individual or institutional insurance services (necessitating special preparation or briefing) other than those stated in Article 29/2 above. This provision, again, is an important attempt at protecting the dividing line between banks and insurance agencies.

The question naturally arises of whether the Draft Communiqué includes the rules necessary for the control and supervision of banks' insurance activities, and the answer is: probably not. True, the introduction of the Draft Communiqué represents an important attempt to place limits on banks in providing insurance services. However, most of its provisions (for example technical personnel or administrative infrastructure of insurance agents) do not apply to banks.

Insurance agents claim that the sale of insurance policies through banks that is not explicitly regulated distorts not only competition between insurance agents and banks, but also violates the right of consumers to receive accurate information on their rights and obligations under insurance policies. In practice, due to the fact that insurance policies are issued automatically with the provision of relevant banking services, it would not be wrong to assume that consumers generally accept the terms and conditions of the policies without being adequately informed about them. Accordingly, the Draft Communiqué should also introduce efficient solutions to protect consumer rights while limiting the scope of insurance services banks may provide.

It would, however, be neither reasonable nor feasible to expect one simple regulation to introduce all of the necessary remedies to this problem. In order to achieve a fair, competitive, well-functioning insurance sector in which banks do not enjoy an unfairly advantageous position relative to insurance companies and agents, regulators should first develop the necessary mechanisms for the control and supervision of banks' insurance activities. Once this is done, the next step should be harmonising insurance legislation with banking and consumer protection laws.

Gökhan Eraksoy and Tugçe Ugurlu

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