Understanding Insurance

11. Why is conventional insurance not in line with Shariah? (part 1)

As promised in the previous article Why do we still need Sharia compliant insurance?, let us now discuss the reasons why conventional insurance is not acceptable by Shariah even though it plays very noble role and several legally recognized fences have been created to protect it from falling into gambling or speculation.

Risk transfer and gharar

Let’s begin with the definition of insurance, that insurance is a risk transfer mechanism. In this case, the risk moves from the original owner to the insurance company. For their willingness to take over the risk, the insurance company accepts premium payments from the risk owner. This definition reveals the characteristics of transaction between the risk owner and the insurance company. There is clearly an exchange between risk and premium. In essence, the contract between the risk owner and the insurance company is a contract of exchange or a contract of sale or al ba’i. That’s why we often use the term ‘to buy insurance’ to express the activities of someone insuring their property or life. Thus, it is safe to categorize (conventional) insurance into commercial or trade or business agreements, where profit and loss are the main premise.

Let’s refresh our memories on the definition of risk itself. Article What is risk? has defined risk as the uncertainty of loss. Underline the keyword of ‘uncertainty’.

Now, if we combine the two discussion above, we shall arrive at conclusion that insurance is a contract of sale of uncertainty, or buying and selling where uncertainty is the commodity being traded. Aha … I hope you are with me, begin to see things getting more interesting, as this is really the bottom of the issue of conventional insurance from Shariah point of views.

If a contract of sale and purchase contains any element of gharar (uncertainty), then the contract is not in line with Shariah. It can be considered haram (forbidden or unlawful) if magnitude of gharar is beyond tolerable level. If the gharar or uncertainty even becomes a subject matter or substance that is being traded, which is exactly what happens in an insurance contract, the magnitude of incompatibility with the Shariah is even bigger and lead to it’s unlawfulness (haram).

Take a moment to see how Shariah regulates prerequisites of the subject matter of a commercial transaction from two sources below.

  • Majallah el-Ahkam-I-Adliya (The Mejelle), chapter 2, article 1, paragraph 201 reads “The thing sold becomes known by a description of its qualities and states, which will distinguish it from other things”.
  • Dr. Muhammad Yusuf Saleem in his book “A Handbook on Fiqh Mu’amalah in Banking and Finance” explained that “The subject matter of a sale contract is a well-defined, particularized and a specific thing”.

Risk or uncertainty is definitely unable to meet such requirements.

As to gharar, it indeed has many negative connotations, including uncertainty, deception, risk, hazard, ignorance and so on. Below are definitions of gharar according to some scholars:

  • Ibn Hazm said that gharar is when the buyer does not know what he bought, or the seller does not know what he sells.
  • Al-Shirazi said gharar is something whose nature and consequences are hidden.
  • Al-Qarafi said that gharar is what does not know its existence in the future.

The existence of gharar brings any party in the contract to be in a unbalanced or unfair bargaining position. They are unable to make decisions based on valid information (informed decision) due to lack of understanding the characteristics (attributes) of the subject matter or consequences of the agreement.

I do hope the above discussion has shed some lights on the main issue of (conventional) insurance from Shariah perspectives. Under Shariah, it is very clear that the sale and purchase must be executed on the basis of Ridha (genuine sincerity of both sides) which can only be achieved with full transparency from both parties so that doubt or uncertainty can be minimized, if not completely removed. In short and simplest words, tell the truth and don’t lie. However, it impossible to achieve full transparency in insurance contract because the subject matter being traded itself is uncertainty. Although the two parties sincerely do not want to lie, they are still unable to provide definitive descriptions or facts on the subject matter, simply because they do not know.

That’s it for now. We shall discuss usury and maysir in the next article.

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