Is Islamic insurance worth venturing into?

trueBy Hussein Ssemambo

Islam has its own perspective of insurance and re-insurance called Takaful and Re-Takaful respectively.  Unlike the conventional insurance where people are charged fees for insurance, Takaful is an Islamic insurance that is embedded in the Islamic commercial transactions (muamalat) which observes the Shariah.

It originates from an Arabic word “kafalah” which means guaranteeing one another or joint guarantee.

History of Takaful

Takaful originated within the ancient Arab tribes as a pooled liability that obliged those who committed offences against members of a different tribe to pay compensation to the victims or their heirs.

This principle later extended into the early second century of the Islamic era when Muslim Arabs, expanding trade into Asia, mutually agreed to contribute to a fund to cover anyone in the group who would incur a mishap or robberies along the numerous sea voyages, that is marine insurance. They based their argument on the Prophet Muhammad’s teaching (hadeeth) which says that;

“The believers, in their affection, mercy and sympathy to each other, are like the body, if one of its organs suffer and complains, the entire body responds with insomnia and fever.” (Sahiih Muslim).

Muslim jurists acknowledge that the basis of shared responsibility as practiced between Muslims of Mecca and Medina laid the foundation of mutual insurance.

Islamic insurance system is based on mutual co-operation, responsibility, assurance, protection and assistance between groups of participants of families.

Participants agree to mutually guarantee each other against a defined loss or damage that may happen to any one of them by contributing as donation (tabarru) to the Islamic Insurance fund.

There is unity and co-operation among participants and profit sharing, which eliminates deceptive uncertainty (gharar) and gambling (maysir) as it is in the conventional insurance policies.

Islamic insurance is founded on the co-operative principle and also on the basis of separation between the funds and the operations of the shareholders thereby giving the ownership of the insurance fund and its operations to the policy holders which is not the case with conventional insurance.

Islam encourages mutual co-operation among participants through sharing responsibility, joint indemnity, common interest and solidarity.

The policy holders in Islamic insurance are joint investors with the insurance operator, who acts as a fund manager (mudarib) or entrepreneurial agent for the policy holders.

The policy holders share in the investment pool’s profits as well as its losses. A positive return on the policies is not legally guaranteed as any fixed profit guarantee would be liable to receive interest and offend the prohibition of interest (riba).

Practical models of Takaful operations
There are basically two models of Islamic insurance that is, al-Mudarabah model and the wakalah model though most jurists prefer the first one.

Al-Mudarabah model
Under this model, there are two key players that is the insurance operator (mudarib) and the capital providers or contributors of funds (sahib-ul-mal).
The insurance operator accepts to work on behalf of the participants or contributors by receiving insurance contributions or instalments through a pool of funds. Under their contract, agreement is reached as to how profits will be shared resulting from the operations of the insurance, for example they may agree to share profit on a ratio of 70:30 or 60:40 accordingly depending on their mutual agreement.
However, due to the uncertainty involved in the conventional insurance, the concept of donation or giveaway is incorporated under the insurance, where the participants agree to contribute as donation a certain percentage of their insurance contributions in case any member of the fund suffers a defined loss.

This element enables members to fulfill their obligations of mutual help and guaranteeing one another. Therefore, it encourages participants to assist each other in case of damage, loss or catastrophe.

It should, however, be noted that the element of profit sharing among participants from the proceeds of the Islamic insurance operations is only made after fulfilling the mutual obligation of assisting one another and this calls for proper asset keeping and sufficient protection of funds against over exposure to loss.

Therefore, the provision of insurance coverage in conformity with Shariah is based on the Islamic principles of al-takaful and al-Mudarabah.

Distinguishing features of Islamic insurance that differentiates it from the conventional insurance.
l Based on donations and must be consistent with the Islamic law. It is bilateral in nature and binds both contracting parties. While in the conventional insurance, sale and purchase contract where the insured buys the promise or undertaking by the insurer of compensation in case of misfortune.

l The Islamic insurance operator acts as a trustee and operator of the fund while the participant pays a contribution and takes precautions to safeguard himself whereas insurer has to pay compensation when catastrophe occurs and the insured will have to pay premium when it is due and has to take precaution any unnecessary or intentional risk under the conventional insurance.

l All participants in the scheme bear the risk collectively in Islamic insurance whilst in the conventional insurance, the risk is borne by the insurer.

l All aspects of operation should comply with the Shariah including investment, and sharing of surplus under Islamic insurance whereas under the conventional insurance it is not the case as they don’t mind about the Shariah prohibitions.

l Under Islamic insurance, nominee receives benefits only as an administrator and is responsible for the distribution according to Islamic inheritance (Faraidh) while in the conventional, nominee is entitled to the insurance benefits.

l In the Islamic insurance system, if the assured dies before the policy matures, the beneficiary is entitled to the whole amount of the premiums, the bonus and dividend and a share of the profits made over the paid premiums, plus a donation from the company out of the participants/policy-holder’s contributions given on the basis of donation. Such a transaction is seen as a mutual contribution towards the welfare of the helpless in society.

Where the insured is still alive on the maturing of the policy he/she is entitled to the whole amount of the premiums, a share of the profit made over the premiums, a bonus and dividends according to the company policy.

The writer is an Msc. Student of Islamic Finance at the Universitie Brunei Darussalam