Insurance Business from the Shariah Viewpoint


Insurance Business from the Shariah Viewpoint

Business Insurance 

In the business insurance and model, insurance companies give policies (such as life, auto, and health insurance) to clients in exchange for a premium. Premiums are
paid to insurance firms by clients in order to acquire policies that fulfill
their demands. All premiums received by each insurance firm are deposited into
a pool fund, which is subsequently invested in safe, revenue-generating
enterprises. The payment of a premium and the occurrence of an insured event
frequently occur at different times. In order to take advantage of this,
insurers invest the pool fund in a variety of ways to produce revenue that can
be used to settle claims.

An insurance
companies’ overall profitability is heavily influenced by investment income. The
claim fund is made up of the pool money and investment revenue together. The
company is considered to be in profit if its overall expenses, including the
cost of paying claims, are less than the amount held in the claim fund; if the
opposite is true, the company is said to be in loss. The corporation incurs an
underwriting loss if the premiums received are less than the cost of the
claims. If the income from investments exceeds the underwriting loss, the
company can be profitable despite the underwriting loss.

Insurance is a
purchase and selling agreement. It is not acceptable in Islam since three
banned ingredients are present. Insurance may assist an economy, organizations,
and individuals in a variety of ways. Shariah, on the other hand, forbids the
functioning of insurance, at least in its current form, due to the inherent
elements of riba, gharar, and qimar in insurance transactions. As a result,
Islamic scholars have deemed traditional insurance to be illegal.

Riba in

Riba al Quran
and Riba al Hadith are the two sorts of riba, and we may grasp what they mean
by looking at the examples below.

Premiums of USD
10 million were received by an insurance business. The corporation invests the
premium money for a profit rather than leaving it idle until it is needed to
settle a claim. The insurance firm need a secure and profitable return on
investment. This could be provided by non-permissible investments such as
making interest-bearing loans to banks and leasing companies or investing in
the stocks of companies that conduct non-Shariah-compliant business. The
insurance company earns a return of USD 1 million by lending USD 7 million to
banks and leasing companies in the form of interest-bearing loans. This is
known as riba al Quran. This amount is placed in the claim fund and used to pay
clients who make claims for their insured losses.

“A,” on the other hand, purchases car insurance for a USD 1 million worth
car, and pays a USD 30,000 as an annual premium. The car is got an accident,
and the damage is estimated to be USD 40,000. The insurance company compensates
person “A” for the loss. The client paid USD 30,000 but received USD
40,000 in return in this case. As a result, the excess of USD 10,000 received
by the client is riba al Hadith.

in Insurance

Gharar derives
from the Arabic word gharar, which means “absence” or
“insufficient information,” resulting in uncertainty. This could be
in the form of a contract, price, subject, or transaction outcome.

Assume a person
purchases insurance for a car worth USD 600,000 and pays an insurance premium
of USD 20,000. Neither the individual nor the insurance company knows whether a
loss will occur, when it will occur, or how much the loss will be. If no loss
occurs, the client will lose money, while the insurer will profit. If the car
is stolen, the client will receive USD 600,000 in compensation and will profit
(as the client receives USD 580,000 more than they paid), while the insurer
will suffer a loss. As a result, at the time of the agreement, it is clear that
the client has a duty to pay the company’s premium of USD 20,000, but the
insurance company’s duty is unclear.

Maysir insurance

The word
maysir, which appears in the Holy Quran, derives from the word yusr, which
means “ease.” This meaning implies that money or goods are easily
acquired or lost in gambling and similar transactions. Technically, maysir is a
contract in which one party’s profit is the other party’s loss based on an
uncertain event. Making a profit at the expense of another party’s loss without
providing that party with any product or service is also known as maysir.

transactions can also be found in traditional insurance practice. Assume a
client purchases home insurance for USD 100,000 and pay an annual premium of
USD 2000 to the insurance company. If the client’s house is damaged within that
year (for example, by fire), the company will compensate the client up to USD
100,000, depending on the extent of the damage. If a fire breaks out and destroys
the house, the company will pay USD 100,000. If there is no fire, however, the
client will lose their USD 2000. The company or the client has no control over
whether or not a fire breakout. If it occurs, the client receives a net benefit
of USD 98,000, while the insurance company loses that amount; if it does not
occur, the client loses USD 2000, while the insurance company gains that

Riba is
classified into two types: riba al Quran and riba al-Hadith. Riba al Quran
refers to a conditional or understood increase versus a loan or debt, whereas
riba al-Hadith refers to excess compensation without any consideration
resulting from the sale of specific goods. Both types of riba can be found in
insurance. Gharar derives from the Arabic word gharar, which means
“absence” or “insufficient information,” resulting in
uncertainty. This could be in the form of a contract, price, subject, or
transaction outcome. Gharar comes on many levels, and excessive gharar is
forbidden. Excessive gharar results in unreasonable benefit for one side and
undue loss for the other, which is forbidden. Maysir (gambling) is also seen in
the insurance industry. The parties involved in maysir jeopardize their
property rights by tying it to the occurrence of an unpredictable event. The end
result is always a win for one party at the expense of the other.

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