INTRODUCTIONHuman a commercial entity seeks to provide insurance
INTRODUCTIONHuman beings have long recognised the need to protect themselves against the impact of risks they face, such as natural disasters, travel accidents, unemployment, sickness or dying at a young age and leaving a vulnerable young family behind.Islam teaches its followers to put their trust in God; at the same time, it also encourages them to use the resources, skills and abilities bestowed on them by God to act responsibly and protect their wealth and property.In this chapter we will look at the reasons why conventional proprietary insurance is not regarded as sharia-compliant and explore the Islamic alternative called takaful.SHARIA PERSPECTIVE ON CONVENTIONAL INSURANCEIn conventional proprietary insurance schemes, a commercial entity seeks to provide insurance cover for a particular risk by charging an insurance premium and make a profit net of any claims and other costs. This model is at odds with the sharia in three key respects:Gharar (excessive uncertainty)Insurance aims to provide protection against an event that could happen but is uncertain in terms of if or when it might happen. Actuaries model the probability of events occurring and seek to set insurance premiums at a level that both compete effectively in the market and maximise profit for the insurance company. These attempts to model the future will invariably be imperfect. Some unreliability will exist in almost all commercial dealings (for example, when a consumer buys fruit, there is a chance that it will not be fully grown). This level of uncertainty is seen as natural and accepted in the market. However, the sharia does not tolerate ‘excessive’ levels of uncertainty (gharar) and most scholars are of the opinion that the uncertainty found in commercial insurance contracts falls into this category.Maysir (betting)Related to the fact that the occurrence of certain events is uncertain, sharia scholars are generally of the opinion that the premium charged by commercial insurance companies is similar to placing a bet (maysir) on whether a particular event will happen. So this is another sharia objection to conventional proprietary insurance.Riba In conventional insurance schemes, either the policy holder will receive more than they pay as a premium (if a successful claim is made) or the insurance company will receive more in premiums than it pays out in claims. Given that the ultimate outcome is a money-for-money exchange, i.e. a premium paid in money is exchanged for a potential payout in money later, and that these two values will invariably be different, in a commercial context this would amount to riba. Riba can also arise if the insurance company invests in interest-bearing instruments such as gilts.TAKAFUL – THE ISLAMIC ALTERNATIVETakaful means mutual cooperation or joint guarantee. It refers to a not-for-profit set-up in which individuals club together by contributing into a common pool. The monies in this fund are used to pay out to members of the pool who have been afflicted by certain events that the members have mutually agreed to cover each other for – travel accidents, for example. The monies left in the pool after paying claims belong to the members.The Takaful Act enacted by Malaysia in 1984 defines takaful as follows:A scheme based on brotherhood, solidarity and mutual assistance, which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for the purpose.The sharia violations of riba, gharar and maysir that are prevalent in conventional commercial insurance contracts do not occur in such a system. Instead of a premium payable in a commercial insurance contract, pool members donate (tabarru means donation) a sum of money to the pool. If a member is paid compensation from the pool, this payment is regarded as a form of mutual assistance rather than as a countervalue paid under a contract of exchange. Hence the issue of riba does not arise in such a system.Similarly, the non-commercial nature of the arrangement means that the prohibitions of gharar and maysir do not apply. It is in a commercial context that the sharia demands as much certainty as possible in the exchange between the two parties to a transaction (i.e. absence of gharar) and forbids gambling/betting (maysir) by either party.Takaful is different from commercial proprietary insurance with regard to who bears the risk. In commercial proprietary insurance the risk is transferred to the insurance company, which takes on the risk(s) covered in the insurance policy in exchange for the insurance premium. Under the takaful system, risk is not directly transferred to any third party but is borne by and distributed among the members of the pool.The relationship between the pool members and the pool is framed in terms of two binding promises: the members promise to contribute to the fund, and the pool promises to pay out in the event of a claim.The takaful system is virtually similar to the concept of mutual insurance, which is still alive today and has a deep heritage in the United Kingdom, rooted in local communities putting money into a common pool to protect members from certain mishaps.It is worth noting at this point that in markets such as the United Kingdom, the provision of takaful products is limited. Where the law demands protection (for example, car insurance is required to drive a car in the United Kingdom) and there is no sharia-compliant alternative available, scholars have permitted the use of conventional insurance products. This is based on the fact that it is a legal requirement of the country and Islamically it is of paramount importance to be law abiding and maintain social order and harmony in society. Where there is no legal imperative but there is no sharia-compliant alternative available, scholars are reluctant to grant the use of conventional insurance products, but it depends on the circumstances of a particular case, may endorse it if it is deemed that the potential loss to the person/entity will be very hard to recover from.