Analysing the Present State and Future Agenda
Studies in Islamic Finance, Accounting and Governance series
Chapter 21: Islamic insurance (takaful)
There is hardly any difference of opinion among Muslim scholars on the need for managing, redeeming and mitigating general, business and life risks covered by the insurance business. However, orthodox scholars have two main concerns about conventional insurance. First, it is uncertain if and when the insured event will take place and, if it does take place, what would be the relationship of compensation to the insurance premium paid. It is possible, in the case of general insurance, that the event will never take place and the policyholder will forgo all sums paid as premiums. In the case of life insurance, death can take place even after the first instalment of the premium, in which case the nominated person gets the entire insured sum immediately and the insurance company suffers a significant loss on this contract. In brief, the occurrence of the insured event and the amount of compensation are highly uncertain. That makes the insurance business similar to gambling, where the gambler does not know about the fate of the game. The uncertainty in the insurance business is excessive and borders on prohibited gharar (excessive uncertainty). Second, insurance companies invest surplus funds on the basis of interest and pay out a part of such earnings to policyholders as bonuses. According to the orthodox interpretation, interest income of the company is riba, and so are bonuses that the policyholders get.
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