IS INSURANCE

HARAM OR
HALAL?
Ahmad Yuzamir
Basic premise on why Insurance is deemed
“Haram”
◦ Gharar – Uncertainty, hazard or risk
Basic premise on why Insurance is deemed
“Haram”
◦ Riba’ – Usury, or excessive interest.
Basic premise on why Insurance is deemed
“Haram”
◦ Maysir – Gambling
Basic premise on why Insurance is deemed
“Haram”
-Islam allow it’s followers to mitigate risk by pooling our wealth and paying out to
those who lose out from an uncertain loss.
-Traditionally in Arabia if a tribesman needed to pay blood money (a large sum) to
someone, then the entire tribe would chip in a small amount to make up the sum.
-They did this as a charitable gesture so no one of their number would be
overcome by the massive payment. Relating to this, fuqaha allow takaful
insurance
-The basic principle of mitigating loss by pooling wealth is uncontroversially halal.
The debate is on how it is done, i.e. the conditions and structures involved.
Basic premise on why Insurance is deemed
“Haram”
- Islam forbids transactions in which there is gharar. The argument against
conventional insurance goes that this is a gharar-based transaction where
something uncertain is being bought in exchange for a premium – so is not
allowed. You are uncertain if you will ever have an accident after you buy car
insurance and most people don’t and lose all their money for no return each
year.
-Al-Bukhari and Muslim record “On the authority of ibn Umar who said that ‘the
Messenger of Allah (peace and blessings of Allah be upon him) prohibited the
sale of fruits until their ripeness and freedom from disease were apparent. He
prohibited both the seller and the buyer.’”
Basic premise on why Insurance is deemed
“Haram”
- Ahmad and Ibn Majah record “The Prophet (PBUH) has forbidden the
purchase of the unborn animal in its mother’s womb, the sale of the
milk in its udder without measurement, the purchase of spoils of war
prior to their distribution, the purchase of charities prior to their receipt,
and the purchase of the catch of a diver.”
- From the Hadiths above we can see that trades involving gharar are not
allowed, as we have already discussed. From hadiths we can piece
together why that is so: in each of these instances the thing that is
being driven at is to have a clear, unambiguous contract where there is
no room for dispute down the line.
Basic premise on why Insurance is deemed
“Haram”
- My argument is that conventional insurance is not such a
contract as it is sufficiently clear.
- All aspects of the protection coverage are clearly tabled out
in the SI, such as Sum Insured, terms, and other benefits.
- Hence there are no ambiguity as to what is being paid for
when one enters into an insurance contract.
Basic premise on why Insurance is deemed
“Haram”
- The fundamental issue is whether the thing being bought in
an insurance contract is tangible and certain enough for the
contract to be deemed valid. The Prophet forbade one from
buying a diver’s catch until he’d actually got his catch, come
back, and started selling tangible fish. The reason was that it
was unclear what exactly is being bought or sold. The object
of the contract must be certain.
Today’s world “Big Data Age”
- But let us imagine the modern day, where big data and
historical statistics allow us to model very accurately what
the average catch will be. In this situation, I don’t see a
problem for Tesco, say, entering a year-long contract with a
fishing company, to provide it whatever it catches, with the
understanding that on average, x amount is what is expected.
Today’s world “Big Data Age”
- Similarly, in insurance, certainly from an insurance
company’s perspective big data allows a lot of certainty as to
where they stand. The trickier question is, do consumers
enjoy the same level of certainty? Well, a competitive market
certainly helps. It helps efficiently price the good that
customers are purchasing: “security” or “peace of mind”. This
ensures that they do not get exploited.
The Security Guard analogy

- Let us analogise with a security guard. He is paid a wage for

providing security. What does that look like? It looks like him
standing around waiting for the one day in the year when he
needs to earn his keep. The rest of the time he is just on
stand-by. But he is being paid for is being on stand-by, being
available, and dealing with any other related requests you
might have. Should security services be Haram too?
The Security Guard analogy

- Similarly an insurer contracts to have available people to

speak to you, provide you with documents should you need
them, and to do checks whenever you claim. They are not
being called upon to deliver money every day, but they are
providing some quite tangible services that are clear and
understandable.
Conclusions:

- Takaful is definitely halal and cooperative insurance is in my

view pretty much equivalent with the exception of the next
bullet point
- Insurers invest in haram areas so to the extent you’re insuring
with a certain return at the end such as life insurance, the
same rulings apply for any fund that you invest in that has
haram holdings (Unit Trust etc…)
Conclusions:

- The kind of gharar that is being forbidden in the Hadith is not

the kind of gharar involved in modern insurance;
- The many positives of insurance outweigh the negatives; and
- If we accept takaful as Shariah-compliant, then we must
accept conventional insurance as Shariah-compliant as there
is little substantive difference between the two (especially as
most Takaful companies are formed by Insurance
companies).