Insurance in Islamic Law

Difficulties with Commercial Insurance in Islamic Law

Prepared by the research committee of IslamToday.net

Published on http://www.islamtoday.com

 

The question of insurance is a major concern of contemporary Islamic jurisprudence. Insurance is an important part of the modern business environment and it plays a vital role in today’s economy. In some cases, people are required by law to take out insurance of one form or another. Many countries make owning automobile insurance a precondition for owning a driver’s license or subscribing to group health insurance a precondition from being allowed to employ others. Financiers often will not loan money unless the property being used as collateral for the loan is insured against loss.

Moreover, people can see that there are clear and undeniable benefits to be had from taking out an insurance policy. An insurance policy provides its holder with a measure of financial security. If a person has health insurance, he can be reasonably confident that medical care will be available to him. If a person has homeowner’s insurance, he is very likely not to be homeless if his house burns down.

For these reasons, Muslims are naturally quite concerned about the permissibility of this kind of business and to what extent they can participate in it. It is one of the most extensively discussed of contemporary issues in Islamic Law and at the same time one of the issues that is most often misunderstood by the general Muslim public.

The purpose of this article is to dispel the commonly held misunderstandings surrounding this issue and to explain exactly why Islamic Law has so many difficulties with commercial insurance. In order to do this, it is necessary to have a correct understanding of what commercial insurance is.

What is Commercial Insurance?

An insurance policy is essentially a contract between two parties whereby one party (the policyholder) pays a fixed premium to another (the insurer) in return for the insurer bearing full or partial responsibility for possible financial losses incurred by the policyholder.

There are many different types of insurance policies. There is life insurance. This is where a person pays a fixed premium to an insurer so that in the event of the death of the person insured, a predetermined sum of money will be paid by the insurer to a stated beneficiary or beneficiaries, who are usually the dependents of the insured party.

There is health insurance, whereby the policyholder pays a fixed premium to an insurer so that the insurer will bear fully or partially the medical costs incurred by those covered by the policy.

There is liability insurance. The policyholder pays a fixed premium to an insurer who agrees to bear the full or partial costs of any losses incurred by the policyholder on account of legal liability.

Other forms of insurance can be taken out against the destruction, theft, or loss of specified property.

All insurance policies share in there being a payment of a fixed sum of money to a party in lieu of that party assuming responsibility for a financial loss that may or may not take place and that may or may not exceed the amount that was paid.

Clarifying Some Misunderstandings

Some people have tried to compare insurance to the practice of al-`âqilah. This is where the tribe of a person found guilty of murder or manslaughter is held collectively liable to pay the blood money to the victim’s next of kin. This is very different from the insurance that we are discussing. This is purely an issue of legal accountability and is not a commercial contract between two parties

Another common misconception that people often have is to assume that insurance is prohibited in Islam because it somehow compromises a person’s faith and his reliance on Allah. They allege that by taking out an insurance policy, the policyholder is displacing his trust in Allah and instead relying on the insurance company.

This argument is not sustainable. As Muslims, we are commanded to consider natural causes and to take necessary precautions. This in no way compromises our reliance on Allah. We know that our providence comes from Allah. However, we must still go out to work and earn a living. We do so relying upon Allah, by His grace, to provide for us from the fruits of our labor.

We are commanded by our religion to take precautions against loss. Anas ibn Mâlik reported that one day a Bedouin riding a camel came to the Prophet (peace be upon him) and asked him: “Can I leave the camel alone and trust in Allah?” The Prophet (peace be upon him) replied: “Tie your camel first, then put your trust in Allah.” [Sunan al-Tirmidhî]

The issue with insurance is not a matter of a person’s reliance on Allah. It is purely a matter of Islamic commercial law. And this is where the problems arise.

Commercial Insurance in Light of Islamic Commercial Law

Islamic Law prohibits business transactions that include a great deal of uncertainty. For example, I cannot sell you an unspecified quantity of peanuts for a fixed amount of money. The amount of peanuts must be specified. I cannot sell you a car for a certain sum of money without the make and model of the car being agreed upon beforehand.

There are many authentic hadîth in this regard. For instance, Abû Hurayrah relates that Allah’s Messenger (peace be upon him) forbade business transactions determined by the throw of a stone and business transactions involving uncertainty. [Sahîh Muslim]

Insurance is the sale of uncertainty itself. This is the strongest reason for its prohibition, since insurance is effectively the sale of a commodity that Islamic Law does not recognize as saleable. You pay the company to assume some matter of uncertainty in your life on your behalf. In life insurance, for example, you pay a fixed premium each month – say $200 – under an agreement that if you die, the company will pay out – say $75,000. If you die in one month, then the company has to pay you $75,000. If you live for forty years, you will have to pay them $96,000. If at that point you fail to continue to make your payments, your policy is cancelled and you get nothing back. Why is this? It is because you received for your $96,000 the benefit of their assuming your risk for you for those forty years. So you received, according to law, the commodity that you paid for during all those years and the company owes you nothing more.

There are other problematic areas with respect to insurance, though these are far less important than the one just mentioned. In many instances, insurance resembles a type of prohibited interest (ribâ al-fadl), where two parties exchange the same commodity – gold, silver, dates, etc – in unequal quantities. Taking another look at our life insurance example above, assuming that you were to die one month into your policy, this would mean that you paid them $200 dollars and they paid you $75,000. Since Islam does not recognize the assumption of uncertainty as a salable item, this becomes an example of exchanging a like commodity (money in this case) in an unequal manner.

Another problem with insurance is that it bears some resemblance to gambling. This comes as a consequence of the uncertainty inherent to the business of insurance. Insurance premiums are set based on the percentage chance that the individual policyholders will collect from their insurance. The company makes its profits by receiving more money from its customers than it pays out to those who deserve to collect. In a somewhat similar manner, a gambling casino earns its profits by calculating probabilities to ensure that its receipts exceed the winnings that it is liable to pay out.