Q. Last year, I signed up with an insurance agent for a pension plan and health insurance, especially since I got badly injured a couple years ago and my parents got broke paying my medical bill. She made a convincing speech as to how beneficial they both were. I recently learned that these are haram. My imam explained to me that insurance is like a gamble and also that the interest generated is haram. I told her this on the phone that I wanted to cancel the pension plan since every month some money is coming out of my account. I already paid for the year for the health insurance. We have a small business and she tried to make a point that don’t we make a profit in our business, well that is just like the insurance company, the interest made is profit from investing in other companies, and I didn’t know how to reply to her. I understand why interest is haram, but how do I explain it to a non-Muslim? She is also a friend and customer of ours so I want to be able to explain to her without any hard feelings. Can you please advise me.
A. In modern terms, an ‘Insurance contract is an agreement whereby one party, the insurer, in return for a consideration, the premium, undertakes to pay to the other party, the insured, a sum of money or its equivalent in kind, on the happening of a specified event, which is contrary to the insured’s financial interest’.
Based on contemporary Insurance experts, that which is really insured is not the items/commodities/assets which are destroyed. Instead, it is one’s financial interest that is insured. This is clearly expressed by Lord Justice Brett in the case of Castellian V. Preston-1883). He says, ‘what is it that is insured in a fire policy? Not the bricks and materials used on building the house, but the financial interest (i.e money) of the insured is the subject matter of insurance’. (Articles on Insurance by Islamic Banking and Finance Institute (UK)- pg. 56).
Based on these explainations given by contempory experts in the field of conventional Insurance, the Shariah scholars view the insurance contract as an exchange where money is being exchanged for money, over time. On one hand, the policy holder pays money in the form of premiums, and on the other hand, the Insurance Company pays a return in the form of money (with an increase) over a period of time.
In Islam, this type of contract brings about the problem of Gharar (uncertainty) which leads to Maisir (gambling), and in the investments aspect, it brings about Riba (interest). All of these are totally condemned in Islam. Therefore, there are three main elements which are to be found in Conventional Insurances and become the cause for its prohibition in Islam.
A brief explaination on these, are as follows:-
Uncertainty (Gharar)
Conventional insurance contract is basically a contract of exchange, i.e. buying and selling, whereby policy (indemnity) is sold as goods, with the premium as the price or consideration.
The consideration must be certain for an exchange contract.
Uncertainty (gharar) in insurance contracts pertains to ‘deliverability’ of subject matter. That is, there is the uncertainty as to:-
Whether the insured will get the compensation which has been promised by the Insurance company?
How much the insured will get?
When will the compensation be paid?
Thus, conventional insurance involves an element of uncertainty in the subject matter of the Insurance Sales Contract, which renders it void under the Islamic law.
Gambling (Maisir)
As expressed by contempory scholars, insurance is a contract of speculation. This has been clearly stated by Lord Mansfield in the case of Carter Vs Boehm- 1766. He says, ‘Insurance is a contract upon speculation, good faith forbids either party from concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing to the contrary’. (Ibid).
The insured loses the money paid for the premium when the insured event does not occur.
The company will be in deficit if claims are higher that premium.
Interest (Riba)
Prohibition of Riba is central to Islamic financial ethics and law. All contracts and transactions must be free from elements of Riba.
Insurance funds are invested in financial instruments which contain the element of Riba.
A general overview of what has been said is that in insurance, the insured person sells his risk at a price to the counter-party, thus including an element of ‘uncertainty’ (gharar) in the contract. Under the shariah, a contract of uncertainty exists when the counter-parties do not know the nature of the counter value that they are trading. A house may burn down, costing the insurer a large sum of money, or it may not burn down in which case the insured person has paid a premium and received nothing in return.
Conventional insurance is not transparent, as companies discriminate when assessing risks factors. For instance, different premiums are quoted, based on age, gender and financial status.
Insurance Companies may also invest in ventures that may involve interest or some form of activity which goes against the teachings of the Shariah.
Conventional insurance is not mutually beneficial, as certain individuals (share holders, for example) benefit at the expense of others. In other words, commercial insurance companies exist to serve the interest of shareholders first, not policyholders.
These are some of the elements which make conventional insurance unlawful for Muslims. It should be noted however, that while declaring the mode and manner in which conventional insurance operates to be unlawful, Islam does not oppose the underlying objective of ‘Insurance’ which is Mutual help, Cooperation and joint guarantee. It also does not go against the act of taking measures against possible dangers or consequences. However, for this, Islam has its own manner of operation which is free from the prohibited elements mentioned above. In this regard, the Islamic Banking and finance industry, has recently brought about the ‘Takaful System’ which replaces the conventional concept of insurance. The Takaful (Islamic Insurance) is guided by the principles of Islam, which aims to establish a social order based on Universal brotherhood in Islam. The Prophet (SAS) clearly indicated to this when he said, ‘A Muslim is the brother of another Muslim, he neither wrongs him; nor leaves him without help; nor humiliates him’. (Muslim).
And Allah knows best.
Mufti Waseem Khan