INSURANCE OR TAKAFUL?

Islamic Appraisal of Conventional Insurance

A majority of Shariah scholars find conventional insurance inadmissible in the Islamic framework. They have several objections against conventional insurance in general, and against conventional insurance for profit in particular.

Maisir
Gambling (qimar and maisir) is clearly forbidden to Muslims. As far as insurance for profit is concerned, it is argued that the insurer effectively "bets" that the contingencies insured against will not occur. The fact that such “betting” is done scientifically with the use of statistical tables and probability distributions does not alter the situation. Most forms of modern day gambling do in fact make use of scientific tools of analysis. However, there are major differences between a game of gambling and insurance.

One, in a game of gambling, there is a conflict of interest between the players. Gambling games are zero-sum games. If a particular team wins a basket ball game, a gambler betting on its win will gain; but only at the cost of another gambler who bets on a defeat. Hence, such gambling has the potential of bringing major conflicts, social discords in addition to bringing financial ruin to some parties. In insurance on the other hand, both parties – the insurer and the insured hope that the contingencies insured against will not occur. Two, gambling generates risk that does not exist before one enters gambling, while the sole purpose of insurance is to reduce, minimize or eliminate risks that are inherently present. Therefore, the analogy between insurance and gambling maynot be sound and indeed, insurance may be the opposite of gambling rather than being similar to it.

Conventional insurance seeks to draw a line of distinction between gambling and insurance with the requirement of “insurable interest”. This implies that the beneficiary in insurance (with the exception of life insurance), must have an insurable interest in the subject matter, or at least an expectation of acquiring such interest. While this avoids the possibility of using insurance as a device for gambling in the conventional sense, the scope of maisir and qimar in Shariah is much broader and includes any form of unjust enrichment of one party at the cost of another. Note here that, the problem of unjust enrichment is very significant when the insurance business is organized as a stock corporation.

The stockholders gain by maximizing the insurance surplus. The problem is considerably reduced in a mutual insurance company where policyholders themselves own the organization. There is however, still a possibility of unjust enrichment within the group of policyholders, which needs to be carefully avoided or minimized.

Gharar & Jahala
As discussed in Chapter 1, a contract must be free from excessive gharar or uncertainty. A major source of gharar is lack of knowledge or absence of adequate, and accurate information. In the context of insurance, it is pointed out that at the time of contracting, the insurer does not know whether he will ever be called upon to pay claims under the policy, nor the size of such claims, if any. Similarly the insured pays a premium (price) but does not know if he is going to receive any financial benefit in future, nor the size of such benefit. The contrary view is that these arguments are misplaced since what the insured is purchasing is insurance against the possibility of loss or “peace of mind”. The insurer's obligation under the contract is not limited to paying claims, but includes holding the assured covered, which commences when the policy period begins or when the subject matter comes on risk. While these arguments sound reasonable, it needs to be noted that there is no basis in fiqh for buying and selling “peace of mind”.

The crux of the problem in fact, lies in viewing insurance as a buy and sale contract between two parties – the insurer and the insured. The insurer has an identity distinct from the insured or policyholders. The objection loses some of its edge when one considers mutual insurance as the form of organization in which policyholders are the owners of the organization

Riba
An insurance agreement in which the policyholder expects to receive a predetermined amount that is greater than that invested clearly contravenes the prohibition of riba. The problem of riba could, however, be avoided where the contract provides for profit shares rather than fixed interest. While the act of investment in riba-based avenues by the insurer does not affect the contract of insurance per se, the nature of investment needs to be Shariah compliant too.

The debate over the legality of insurance has occupied Islamic scholars for a long time, but international consensus was reached only at the First International Conference on Islamic Economics held at Makkah, in 1976, which decided that insurance for profits is contrary to Shariah. The Fiqh Council of the Muslim World League ruled in favor of what it called the “cooperative insurance”, which visualizes a group of people working in the same type of business establishing a joint fund, to which everyone of them contributes. The purpose of the fund is to compensate any one of them who suffers specific losses, due to unforeseen circumstances. There is no element of profit in this type of insurance. If the fund is established for a specific period of time, then when that time lapses, the money still available in the fund is given back to the members in the same percentage as of their contribution. It is fairly clear that the chief objection to insurance for profit rests on the maisir element.


Islamic Alternative(s)

Insurance is permissible in Islam when undertaken in the framework of takaful or mutual guarantee and ta’awun or mutual cooperation.

Takaful ta’awuni or Islamic cooperative insurance is not a contract of buying and selling where a party offers and sells protection and the other party accepts and buys the service at a certain cost or price. Rather, it is an arrangement by a group of people with common interests to guarantee or protect each other from a certain defined misfortune or mishap through the creation of a defined pool contributed out of their common resources. It, therefore, portrays the sincerity and willingness of the group to help and assist any one among them in times of need. Essentially, the concept of takaful is based on solidarity, responsibility and brotherhood among participants who have agreed to share defined losses to be paid out of defined assets.

Takaful involves each participant giving away as donation or tabarru a certain proportion of the full amount of his or her contribution. The financial assistance paid to a participant facing a loss or damage is from a fund that iscontributed by all participants by way of donation. After the takaful benefits are paid, the remaining surplus is paid back to the participants. Thus, there is no element of gambling or unjust enrichment in this arrangement. In view of the fact that the defined fund belongs to the participants, the practice does not aim at deriving undue advantage at the expense of other individuals. Further, the transaction is clear-cut and transparent and there is no element of uncertainty or gharar with respect to the contribution and financial assistance. Avoidance of riba-based and other unIslamic investment takes care of the remaining objections.

Takaful is a form of insurance that is based on the system of cooperation, mutuality and shared responsibility as founded in the concept of takaful and ta’awun. Thus, it is a form of insurance that is acceptable in the Islamic financial system.

The major points of difference between conventional and Islamic insurance may be enumerated in brief as under:

Conventional Insurance is based on profit-motive and aims to maximize returns to shareholders. The business of insurance is, in essence, “owned” by shareholders of the insurer company. Islamic insurance, on the other hand, is based on the motive of community welfare and protection. The business of insurance itself is non-profit. The insurer is now called the takaful operator who receives a fair compensation, either through a share in returns on investment of funds or through agency fees. The business of insurance is, in essence, “owned” by policyholders and the operator company acts as the agentmanager.

In case of conventional insurance, insurer’s profits include underwriting surplus, which is the difference between total premium received from and total claims and benefits paid to policyholders. Essentially, profit comprises underwriting surplus plus investment income. The distribution of profits or surplus is a managerial decision taken by the management of the insurer. As a result there is a conflict of interest between shareholders of the insurer company and the policyholders. In case of Islamic insurance, on the other hand, the operator has no claims in underwriting surplus. Further, it is the takaful contract, not the management of the operator company that specifies in advance how and when profit will be distributed. There is little room for conflict between interests of shareholders of the operator company and the policyholders. This point is further elaborated in the subsequent chapter dealing with alternative models of Islamic insurance.

In case of conventional insurance, the sources of laws & regulations are set by state and are man-made. In case of Islamic insurance, the laws and regulations are based on divine revelations. A manifestation of this is in the right of insurable interest that is vested in the Nominee absolutely inconventional life insurance. The same, however, is determined by Islamic principles of inheritance (faraid) in case of Islamic insurance.

Just as in case of the insurer, the insured or policyholders may or may not be governed by the profit motive. For instance, in conventional insurance, the insured or policyholder may decide between original cost or replacement cost as the basis of valuation and claim accordingly - whether or not they chose to rebuild property. In Islamic insurance, however, the insured may not "profit" from insurance and are entitled to compensation only for repair or rebuild or replacement.

In conventional insurance the investment of premiums is entirely at the discretion of the insurer with no involvement by policyholders. As such, investment usually involves prohibited elements of riba and maisir. In Islamic insurance, on the other hand, the takaful contract specifies how and where the premiums would be invested. By definition such investment would exclude prohibited areas.

In case of dissolution of the former, reserves and excess/surplus belong to the shareholders. In case of dissolution of the latter however, reserves and excess/surplus could be returned to participants, or donated to charity. Most scholars would prefer the latter course of action.

The Islamic insurance company has an additional obligation of annual payment of zakat.


dipetik dpd kertas kerja
ISLAMIC FINANCIAL SERVICES
Mohammed Obaidullah
Associate Professor
Islamic Economics Research Center
King Abdulaziz UniversityJeddah, Saudi Arabia