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Legal Alerts

Participation (Takaful) Insurance Details Revealed

Legal Alerts

Recent Development

Our last client alert announced that the regulations regarding participation insurance (takaful) were underway.
While the Insurance Law No. 5684 (“Law”) did not previously regulate the participation insurance model, with respect to the Supplementary Article 1 of the Law, the Undersecretariat of Treasury now regulates takaful insurance through the Regulation on Operating Procedures and Principles of Participation Insurance (“Regulation”). The Regulation was published on the Official Gazette No. 30186 dated September 20, 2017 and will enter into force within three months from the date of publication.

What’s new?

The insurance companies wishing to operate in the takaful insurance area must consider the following.

  • Insurance companies (“Companies”) will form a risk fund (“Fund”) to collect participants’ contributions and related income and cover disbursements and expenses, including payments regarding indemnity and/or savings and legal obligations.
  • Companies will form an Advisory Committee (“Committee”) that operates under a company’s board of directors and adopts decisions independently or receives outsourcing services to ensure compliance with the interest-free insurance finance principles.
  • If Companies purchase reinsurance and/or participation reinsurance protection  to manage the risks of the Fund, the Committee’s approval must be obtained and the participants must be informed accordingly.
  • Companies can operate according to the management models (mudarebe, proxy and/or hybrid, etc.) mentioned in the Regulation or another Committee-approved model. Companies must clearly state which management model will be applied in the insurance policy.
  • Companies are required to publish information regarding the status, amount and return results of investment instruments to which the Companies’ direct their funds in the annual activity reports.
  • Companies, as fund managers, are obliged to ensure that each product offered is priced properly for each risk.  If the Fund fails to deliver its legal and administrative duties and the reinsurance/participation reinsurance protection is deficient, Companies must meet the deficit through liquidity. The amount to be recovered from liquidation is announced on Companies’ website.
  • Companies will manage the Fund (which is composed of the participants’ contributions) and the shareholders’ fund separately.
  • All costs and commissions related to insurance operations are covered from the Fund by Companies on behalf of the participants. Companies will announce the Fund’s annual income and expenditure items on their websites.
  • Companies will provide the Fund’s balance at the end of each period in accordance with the participation policies and announce the shortfall or surplus occurred in Fund on their websites. Surpluses can be used
    • to reduce the contribution premiums;
    • to reserve an emergency reserve fund for future unpredictable risks; and
    • to distribute completely or partially among the contributors.
  • If an emergency reserve fund is reserved, this fund will under no circumstances be distributed to the shareholders/members of Companies and not be considered in the calculation of distributable surplus.


The demand for interest-free insurance has risen along with the development of interest-free banking.. While a few insurers already provide interest-free insurance products, this area remained unregulated until very recently. The Regulation will answer the rising demand for these insurance products and is expected to diversify market players by attracting insurance companies from countries where interest-free insurance products are common practice towards Turkey.