Insurance Islamicity

Insurance is an exchange contract. Ibn Abidin rejected it as it did not fit in the exchange contracts known in Islam. The first phase of acceptance of insurance took place when the so called Modernists became the trend-setters for Muslim society, particularly under the leadership of Muhammad Abduh. A series of attempts were made to insert insurance into permitted contracts and to prove its legality.3 A correspondent of Pakistan, and Gulf Economists cites fatawa (religious rulings) of prominent ulema (Islamic scholars) of different mazahib (Islamic schools of thought)4 generally favouring insurance, and refuting the presence of riba (usury and interest), mai'sar (gambling) and gharar (indeterminacy) therein. Another survey of fatawa for and against the contract of insurance issued up to 1965 is given in Muslehuddin.5

In its 1972 meeting the Islamic Studies Conference (ISC) considered eighty opinions on insurance submitted by scholars worldwide, but adjourned without making final recommendations, leaving the topic pending for further study.6 Interestingly, fuqaha have seldom given unanimous recommendations on the issue of insurance. For instance, recommendations of the Majlis Fiqhi Islami were dissented by Sheikh Mustafa Zarqa and of CIIP were dissented by Abdul Malik Irfani.7

Positions taken by scholars on insurance differ depending on their views regarding presence of gharar, riba, and gambling in insurance contracts. Gambling and riba are condemned in the Qur'an while condemnation of gharar is supported by (chained) Ahadith (Prophet’s rulings).8

Insurance is blamed for gharar because, at the time of the contract, the insured are uncertain about (i) occurrence of indemnity, (ii) amount accrued in case of indemnity, and (iii) the timing of indemnity. But supporters of insurance argue that these matters are unknown only at the individual level, while at the collective level, they are scientifically determined by statistical laws of large numbers, actuary and probability. It would not be proper to prohibit it due to gharar at the individual level.9

Gharar inherent in the contract of insurance is condoned under the doctrines of darura (necessity) and mosalahah (public interest). Siddiqi10 emphasises that the present system of wealth creation and the present level of civilisation is simply inconceivable without recourse to insurance. Insurance is important, he argues, for the smooth flow of business activity and production processes; large-scale supply of capital; availability of goods requiring a long production period; and reduction in cost of goods. Others argue that insurance is a hedging against misfortunes through personal means rather than relying on the public means or family support, which may not be realised.11

Insurance is declared mai'sar because the policy holders are seen to bet premiums on the condition that the insurer will make payment (indemnity) on the happening of a specified event. The advocates of insurance argue that insurance is the contract of indemnity,12 which is altogether different from gambling. A specified event must occur by the appointed time and one of the parties must win or lose in gambling. In the case of insurance, the specified event may or may not happen during the policy period. But the indeterminacy of event used to disclaim gambling can be cited as a reason for gharar. Moreover, the insured holds a specific financial interest, called insurable interest, in the subject-matter of insurance. He is entitled to compensation only if he suffers any loss or damage and indemnity is limited to the actual loss or damage. In gambling, the parties have no other interest than the sum to be won or lost by the determination of an event. They further argue that the act of gambling creates a new risk while insurance tries to manage inherent, though predictable, risks to make losses bearable to the individuals susceptible to such risks. The risk of financial loss courted by a gambler can be avoided if desired, but the inherent risks cannot be avoided. Insured persons seek protection against the financial loss which may result from such risks.13

Riba refers to transactions involving unequal exchange of the same thing. Insurance is viewed as unequal exchange of money in premiums and compensations. In fact, money paid in premiums, never equals the money received in indemnity. The insured receives less or nothing, as the case may be, in exchange of the premium when (i) he withdraws the policy, (ii) defaults on premiums, (iii) does not experience peril deserving indemnity and (iv) the insurance contract is declared void due to any other reason. Moreover, compensation received from insurers may be far greater than the premiums if a peril strikes. So riba accrues to the insured if the indemnity is more than the premium and to the insurers when compensation is nil or falls short of premiums. Therefore insurance contract, interpreted as exchange of money, cannot be free from riba. Moreover, there is riba beyond the riba embedded in the insurance contracts since the premium is invested by insurers in interest-bearing securities.

The advocates of insurance argue that there is no riba in insurance because neither is the premium a loan nor compensation a returning of the loan with an incremental amount. The money received in claim by the insured neither depends on the elapsed period nor on the total money in the premium. The amount actually depends on the extent of financial loss incurred in consequence of a peril. Such increment is not riba.14

It is also argued that individuals engage in riba transactions with the sole purpose of monetary gains. Insurance is a systematic pooling of individual resources to cover collectively the expected inherent risks of loss that each and every member faces. The purpose of an insurance policy is to protect, not to enhance, the financial position of the insured.15

Insurance is also considered unlawful because the compensation is given to nominees, which is contrary to the Islamic laws of inheritance.

Qur'an16 ordains compensation including monetary benefits to the victim's family for killing someone by mistake. Therefore, in principle, there is no harm in obtaining monetary gains against this death of a family member which seemingly justifies conduct of life insurance. In fact, liability insurance covering compensation to victims of (say) accidents shall be made compulsory in Muslim countries to ensure compliance with the Qur'anic injunction, particularly when damage is done by the financially weak or runaway aggressors.

Insurance is also an essential part of banking and international trade transactions. For instance, banks do not negotiate the international bills of exchange unless the goods are insured against Marine insurance and do not finance large industrial projects without an insurance arrangement.

Omar Farrukh argues that "insurance may be equated with an agreement between two parties in which one gives a guarantee to the other regarding some property in possession of the other against its perishing, undergoing startling degradation or deviating from its normal course of development Islam admits some aspects of this guarantee."17 Obviously, if insurance is viewed as a contract of guarantee, rather than an exchange of money, then it is absolved of contractual riba.

However, commercial insurance has been generally condemned while mutual insurance, organised as a private or a public venture, is commended.18 Commercial insurance is condemned because insurers are alleged to "profit out of the weakness of individual insurees".19 But, barring the profit motive, mutual and commercial insurance are not very different.20 Profit-seeking activities are not prohibited in Islam. Moreover, insurance performs security functions similar to zakah, although to different categories of people. As managers of zakah are entitled to a remuneration from zakah fund then, in principle, the managers of insurance should not be denied profits for performing insurance services.

In a nutshell, insurance itself is not contrary to Islam. However, the conduct of insurance is suspect mainly on account of gharar, riba and gambling.