Principles of Islamic banking and finance/PIBF203/Takaful/Juristic view

Some issues make the concept and the contract of insurance not acceptable by Muslim jurists. Their views regarding the lawfulness of insurance can be categorized into three groups. The first group rejects all forms of insurance. They argue that all forms of insurance contracts involve elements of gambling (Mysir), uncertainty (Gharar), and interest (Riba). The main issue in insurance is gambling; some features in insurance contracts make them similar to gambling. For example, the payment of a premium is similar to the cost of a lottery ticket, and the receipt of an amount usually greater than what was paid is as payment received in a gamble. The element of uncertainty (Gharar) exists because policyholders do not know how  profits  are  distributed  and  where the funds  are  invested  in. The element of interest exists because usually insurance companies invest the premiums and the surplus funds in interest-bearing bonds because they are less risky. Because of these issues, insurance was prohibited by some Muslim Jurists such as Atif Khatana. According to him, no one needs to do insurance because he believes that God is there to take care of all people.

The second group permits the mutual cooperation insurance and prohibit the commercial insurance and the life insurance. According to them, cooperative insurance is permissible because it is based on mutual help and voluntary contribution. It supports the social cooperation and mutual protection among human beings. The Gharar in this form of insurance is not excessive. Furthermore, they argue that even if the insurance compensation exceeds the sum of premiums paid, that does not consider Riba because the premiums do not grow with time, and they are paid as voluntary contributions which make them different than gambling activities. However, this group prohibits commercial insurance -more specifically life insurance- because they think that the contracts of this form contain excessive Gharar. There are some Jurists who argue that life insurance contradict with Islamic principles such as the principle of Tawakkul dependence on God), Al-Mirath (the distribution of wealth after the death of a person among his / her heirs, according to the rules of Shar’iah,, and Al-Wasiah (part of wealth that could be distributed according to the will of the deceased). While, there are some who believe that insuring somebody's life is unlawful because no one can ensure one's life against death. According to the third group of scholars, conventional insurance can be made acceptable with some adjustments. According to them, the concept of insurance is in line with the principles of Sharia’h. The issues that exist in the traditional insurance contracts can be solved to make them Sharia’h compliant contracts. The most prominent voice in this group is the voice of Dr. Mustafa Al-Zarqa. He published two articles in 1961 and 1976 and insisted that the concept of insurance should be accepted from Shar’ah point of view. The recent fatwa regarding this issue came from the Grand Mufti of Egypt, Dr. Ali Juma. To support their view, they used some texts from Quran and Sunnah beside the logical analysis. They argue that there is no proof in the texts of the Quran and Sunnah forbid any form of insurance itself. The verse "O people of faith, fulfill your contracts" [4:1] does not exclude any type of contracts, so it is applied to all types of contracts including insurance contracts. Moreover, they used the Prophet’s speech in Mina as a proof when he said "It is not permitted for anyone to take the property of his brother except with his consent". Therefore, from the speech, transactions are permissible in general. The prohibited transactions are only the ones that take the property of others without their consent. In this regard, insurance contracts are based on mutual agreement of the two parties, therefore, it is not forbidden. Regarding the issue of gambling, the proponents tried to find differences between gambling and insurance. They argue that even if the two look similar, in closer inspection they are fundamentally different. In gambling the gambler seeks for a risk which does not exists naturally. In the other hand, insurance is concerned about the risks which exist naturally and which are part of human life and business activities such as car accidents or risk of fire. They also argue that the main objective of the gambler is to maximize profit, while in insurance, the insured person seeks protection against a loss. When a gambler wins, he receives a sum of money which can hugely increase his wealth without any effort. In contrast, the insured person is only compensated for the loss he has already suffered. The issue of interest, according to them, can be simply solved by investing the funds in Shariah-compliant activities.

In their view, Gharar in life insurance contracts is not the prohibited one, because it is a contract of voluntary contribution and it does not lead to disputes between parties. The one who buys life insurance policy simply wants to leave something for his family if he dies during the insured period. This act is permissible and people are encouraged not to leave their families pitiable. Prophet Mohammad (PBUH) said that “It is better to leave your offspring wealthy than to leave them poor asking others for help ...". Moreover, life insurance does not conflict with the principle of Mirath and Wasiyah because the nominee is a trustee who is obligated to receive the benefits over the policy and distribute the benefits among the heirs based on Mirath and Wasiyah principles.

The Controversy over Life Insurance
In the western tradition, a life insurance policy is a contract whereby an insurer agrees to pay a designated recipient a specified sum of money on the occurrence of a certain event. The three basic plans are term, whole life and endowment insurance. With term, a fixed sum is payable if the insured dies within a specified period; with whole life, the sum is payable on death whenever it may occur. For endowment insurance, the insured receives a fixed sum at the end of a specified period if he or she is still alive; otherwise a designated recipient receives the amount at the time of the insured’s death Goldstein (1998;5).

A number of objections are raised against the practice of life insurance. Among others, Nejatullah Siddiqi (2000) and Masum Billah (undated) have convincingly refuted these objections. According to Masum Billah, in the context of life insurance generally the following objections are raised: 1. “It is contrary to the principle of Tawakkul. In an insurance policy, the insured puts a trust on the insurer to protect him against an unexpected loss instead of putting his trust on All-Mighty Allah (SWT). Such practice is against the principle of Tawakkul as every believer is obliged to put his own trust (Tawakkul) on Allah (SWT.) only. Allah (SWT) says to the effect:

"... but on Allah (SWT) put your trust (Tawakkul) if you have faith...."

2. “It is contrary to the principles of Mirath and Wasiyah. This is because in a life insurance policy the nominee(s) is (are) an absolute beneficiary(s) over the policy after the demise of the insured, in which the nominee(s) deprived the heirs of the deceased from their legal rights based on the principles of Mirath and Wasiyah.”

3. “Some Muslims and even some Islamic scholars claim that a life insurance policy means to ensure one’s life against death and such practice is unlawful. Allah (SWT) justifies to the effect:

"… Verily the knowledge of hour is with Allah (SWT). It is He who sends down rain and He who knows what is in the wombs nor does anyone know what it is that he will earn tomorrow, nor does anyone know in what land he is to die. Verily with Allah (SWT) is full knowledge and He is acquainted (with all things)....”

4. “An insurance policy stands towards ensuring one’s wealth and property. In the light of the Shari’ah, a transaction which guarantees protection of other’s property is said to be invalid except in three situations: fear for unjust enrichment; fear of losing one’s property; and fear of one’s property being destroyed or perished. This view was upheld by Shaikh al-Azhar Zal al-Haqq in denying the validity of life insurance policy.”

Some objections against the practice of life insurance were raised because of the very use of the terminology “life insurance”! The term seems to imply that the insurance companies are insuring policyholders against their death! This is indeed never the case and Islamic insurance or takaful companies have rightly replaced the terminology of life insurance with family takaful to remove this confusion.

According to Masum Billah, an insurance policy does not supersede the will of Allah (SWT). In such a policy, particularly in a life insurance policy, it is not the aim to ensure and determine one’s life or death; nor does one intend to determine the future material luck of one’s dependents. A life insurance policy also does not connote the idea of the assured trying to protect his life from death against the will of Allah (SWT). An insurance policy also does not mean that the insured is determining his future financial capacity. A policy, whether it is general or life, simply means that both the insurer and the insured have entered into a contract of insurance, and mutually agree for a compensation or security against an unexpected tragedy. Such a concept is, of course, in line with the Islamic principles whereby Islam encourages the Ummah to strive hard in overcoming difficulties in their lives. The Prophet (SAW) said to the effect:

"... Narrated by Abu Huraira (R ) the Holy Prophet (SAW) said: Whosoever removes a worldly grief from a mu’min, Allah (SWT) will take away from him one of the grieves of the hereafter. Whosoever alleviates a needy person, Allah (SWT) will alleviate from him in both the world and the hereafter...."

It is unnecessary to claim that the primary intention of insurers in life insurance agreements (or for that matter any insurance) is to remove a possible grief from a person. Insurers are clearly motivated to gain a fixed remuneration and/or a share in the profits or surplus of the underlying business and there is nothing wrong in that motive. Similarly, the policyholders of an insurance company participate primarily for their own interest and there is nothing wrong with that intention either. They understand and willingly accept the fact that if they do not face any calamities, their premium could be used to make payments to those who may incur losses. For them, buying insurance provides a sense of security worth paying the premium. In the case of an endowment life insurance, the accumulated premium keeps growing with the addition of returns from investments. Although, under the Islamic insurance or takaful schemes, the yearly rate of profits will be variable, it is expected that the average rate of profits over the insurance period would be positive.

It is unjustified to claim that by buying life insurance, a person puts his trust (tawakkul) on the insurer. It is an attempt to make provision for his heirs in case something happens to him. This becomes possible because many other people like him have similar desires, who agree to join hands in their own interests with the expectation that only some of them may face death. The following Hadith is a clear proof of this claim. "The Holy Prophet (SAW) told a Beduin Arab who left his camel untied, trusting to the will of Allah (SWT), tie the camel first then leave it to the will of Allah (SWT)..."

Let us have a deeper look at what is fundamentally involved in a life insurance agreement. When a person purchases an endowment life insurance policy (the most general form of life insurance), he agrees (to save and) to make periodic payments (premiums) to an insurance company for a specified period of time; in order to receive a certain amount of money at the end of the term of the policy. In a term life insurance, it is possible that an individual may not be saving any amount for a life insurance company. He may instead be paying a yearly premium to the company and his heirs may get a substantial amount if he dies in that year; the same as a house owner may get a substantial amount of money from an insurance company in case his insured house is destroyed by fire. The fact that the transaction and the underlying agreement are not similar to gambling should be very clear: an insured person does not wish to die. Rather he and his heirs pray for his health and well being. They normally do everything to keep the person healthy. The main goal is not to become rich quickly but to leave something for the family if the person dies during the insured period.

There are many other individuals who are involved in similar contracts, purchasing policies with varying terms and values from the company. Each one of them is primarily interested in saving for the future, for himself and for his family members. This is purely an act in their self-interest and an act that should be, in our opinion, Islamically permissible. The following Hadith is a clear proof of its acceptability:

Narrated by Saad bin Abi Waqqas (R): The Holy Prophet (SAW) said: “It is better for you to leave your offspring wealthy than to leave them poor asking others for help...."

Masum Billah emphasizes that life insurance policy does not contravene the principles of ‘Mirath’ and ‘Wasiyah’. In a life insurance policy, the nominee(s) is nothing more than a trustee, as held by the supreme court of Pakistan. The nominee is under an obligation to receive the benefits over the policy on behalf of the heirs of the deceased (assured) and distribute the benefits among the heirs of the deceased in accordance with the Islamic principles of Mirath and al-Wasiyah.

Masum Billah also refers to Al-Zarqa, Al-Alwan and Adil Salahi in supporting the view that the nature of a life insurance policy is similar to that of a retirement pension scheme which is generally regarded acceptable by Ulema.

There is however, some difference between life insurance, specially the term life insurance, and pension schemes. In a term life insurance it is possible to buy a life insurance on a year-to-year basis the same as an automobile insurance or fire insurance for a year. In case the person dies, his nominee would get the face value of the insurance coverage. If he remains alive he would loose the premium. Hundreds and thousands of people buy such insurance and pay a premium not because they want to die and get unlawful money from others through the insurance company, but to arrange something for their heirs in case they face death. All the participants in this scheme are happy to live on and do not mind that their premium has gone to families who lost their bread earner or caretaker. In this regard, in our opinion, there was no need to introduce the terminology of tabarru in takaful literature. Any contribution made to a fund by a person so that he could himself be a beneficiary (the probability of which is more or less similar to that of any other participant) could not be termed a donation. This unnecessarily invites criticism by the detractors of the Islamic economic and financial system.

The people who manage these companies, make investigations about the people being insured and the claims being made, and invest available funds prudently and efficiently, should be eligible to get fixed salaries and / or a share in the surplus. The management of insurance companies could be formed in different ways. Managers of insurance companies could be hired (as mudaribs, using the Islamic terminology) by the very people or their representatives who pay the premium. Alternatively, these managers can establish an insurance management company and offer their services as mudaribs. Similarly, another group of people seeking profits can provide funds through buying shares to run a stock insurance company. In the following sections we will argue that while all these arrangements could be Islamically permissible, the choice of an organizational setup should be made in accordance with the goals of Islamic insurance.

Another point worth mentioning here is that although there are other modes of savings available, life insurance, like pension schemes, are generally constructed for longer terms. These schemes are also relatively less flexible compared to other savings alternatives such as mutual funds and fixed savings deposits in allowing the policyholders to withdraw their accumulated savings without any penalty. Similarly, long-term bonds, another mode of saving, are bought and sold in the secondary markets, whereas savings with insurance companies cannot be negotiated in any secondary markets; making them less liquid. These long term saving arrangements through life insurance policies allows insurance companies to make long term investments and get relatively higher rates of return. The provision that, in case of the death of a policyholder, an endowment life insurance company would pay to the heirs the full amount of his insurance policy is also an incentive to make serious commitment for long-term savings.

The primary goal of conventional stock insurance companies is to maximize profits for its owners (equity holders). On the other hand, in principle, the policy holders own mutual insurance companies. All other things equal, the policyholders should be relatively better off by joining a mutual insurance company. However, the existence of both types of the companies for a very long period of time proves that ‘other things’ may not always be equal. Obviously, the first thing that naturally comes to mind is the issue of equity and efficiency. Any movement towards mutualization of a stock insurance company or a demutualization of mutual insurance to a stock insurance company must be related to equity and efficiency. Islamic insurance or takaful, must be required to run under such an organizational and regulatory framework that it naturally moves toward achieving both equity and efficiency.

Kathy Smith points out that in the United States, it wasn't until 80 years after 1840 - when for the first time the concept of insurance got prominence - that life insurance really took off in a big way. The key to its success was reducing the opposition from religious groups in that country (Smith, p. 2). The concept of takaful and family takaful is becoming more and more popular and acceptable. It is hoped that the remaining objections will soon come to an end, the focus and energies of both theoretician as well as the practitioners will now be shifted to set the goals of an Islamic insurance system and suggest ways to achieve these goals.