Understanding Insurance

10. Why do we still need Shariah compliant Insurance?

Previous nine articles have introduced what risk is, how it is categorized based on frequency and severity, briefly discussed how insurance deals with risk through pooling of risks and law of large numbers.

We have also defined (conventional) insurance and introduced several fences to keep insurance away from gambling or betting and prevent the misuse of insurance by speculators or anyone who want quick results out of it. Those fences are in the form of conditions for a risk to be insurable along with the basic principles of insurance.

(Conventional) insurance is defined as a risk transfer mechanism from the risk owner, hereinafter referred to as the insured to the second party in this case the insurance company, hereinafter referred to as the insurer. In this insurance agreement the insurer agrees to indemnify or compensate the financial loss suffered by the insured caused by certain risks (subject to exceptions and terms and conditions). On the other hand the insured agrees to pay a sum of money called a premium in return for the willingness of the insurer to bear the transferred risk.

Perhaps many are wondering, why is (conventional) insurance rejected by shariah? Isn’t it a very noble concept as it brings peace of mind to the owners of risk? With the claim amount from insurance, a family could avoid a deep deterioration of their life. Business can quickly recover after a loss and the economy can run faster and more efficiently because insurance compensation avoids or at least reduce the allocation of economic resources to post-disaster recovery, so that it can be used for other more productive economic activities.

Furthermore, insurance companies are willing to be a risk carrier with a relatively small premium in relation to potential loss. Insurance also in turn suppresses the waste of tax payers money for disaster relief and so that can it be allocated to other programs for the welfare of the people. Isn’t all this in line with Shariah? Where else is the problem?

Many books and articles have explained that conventional insurance is not in line with sharia because of the three elements of riba (usury), gharar (uncertainty) and maysir (gambling). Alright, let’s digest this problem slowly, using simple logic and language to make it easy to digest. We will start in the next issue.

So, stay tune, lah!

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