Is insurance permissible in Islam? A simple answer to the question is in the affirmative, provided that the buying and selling of insurance fulfils all shari’a requirements. Let us look at what happens in the case of buying and selling insurance before we come up with a verdict on its permissibility or otherwise in the shari’a. Person “A” wants to protect for the loss of his car (due to theft, fire, accident or any other reason), and approaches an insurance company, which offers to protect his car by way of making his loss good (as and when it occurs) provided that person A pays the insurance company a fixed amount, commonly known as premium, which can be paid upfront or in easy monthly installments.
It seems like a simple transaction but it has some shari’a issues which need to be highlighted. It is important to understand what is being sold here, for what price, when it is paid and when the delivery of the object of the sale takes place. Apparently, the insurance company sells indemnity to the insured. It is a kind of guarantee. Buying and selling unbundled guarantees is not recognised in Islam. Thus, it is not permissible for someone to guarantee someone’s performance in exchange for a consideration. It is, however, permissible, for the guarantor to make the guaranteed person or company pay for the administrative costs for providing a guarantee.
The insurance contract, being a contract of indemnity between an insurance company and the insured, involves the selling of a type of guarantee for a price and, hence, from a shari’a viewpoint is something questionable. There are some other technical objections to conventional insurance. Three of them are given below:
Many jurists view the selling and buying of insurance as an extension of the practice of paying and charging the prohibited interest (called riba in Islamic law). Riba in simple words is the unequal exchange of an asset (money, commodities or any other financial asset) whether on spot or in future. In the case of insurance, it is very likely that unequal exchange of money takes place between the insurance company and the insured. For example, if an insured pays Rs50,000 towards the insurance of his car and it happens to be the case that nothing happens to his car, resulting in no-claim for the duration of the insurance contract, the insured ends up paying Rs50,000, without receiving any thing in return. This is technically Riba, which is prohibited. As was said earlier, the sale and purchase of indemnity is not recognised in Islam; hence Rs50,000 cannot be regarded as the price of providing indemnity.
Another argument against conventional insurance is based on the prohibition of contractual uncertainty (or what is known as gharar in Islamic law). In simple words, a transaction involves gharar if there is no specification of and explicit agreement of the transacting parties on the price, object of sale, and delivery date and place.
In the case of insurance, while the premium (price) is known, agreed and paid precisely, the insurance benefit is not specified and known precisely at the time of entering into the insurance contract. Furthermore, it is not certain if the insured will ever get any benefit, as it is contingent upon an adverse event (such as theft, fire, accident, etc) happening. Because of this gharar (contractual uncertainty), the insurance contract falls short of fulfilling the requirements of a valid sale in the eyes of the shari’a.
Many earlier Muslim jurists viewed life insurance as an act of “insuring life” and, hence, viewed it as an intervention in the divine order and destiny. This view however was short-lived as life insurance is merely part of financial planning for the family to avoid financial distress in the aftermath of the death of a family head. Nevertheless, it is important that any such financial planning respects the prohibitions of riba and gharar. Because of these fundamental problems with conventional insurance, an Islamic solution for wealth preservation and management was developed in the 1970s, which is based on the concept of Takaful (mutual cooperation). Takaful-based insurance addresses all the above-mentioned issues and is based on models that avoid riba and gharar.
The writer is a shari’a advisor to a number of banks and financial institutions and can be contacted at [email protected]
