Insurance in Islam is essentially a concept of mutual help. Insurance business under conventional system is based on uncertainty, which is prohibited in Islamic society under Islamic principles. So there is need to clear the difference between the conventional insurance and the Islamic insurance. An insurance contract minimizes the risk of loss due to accident or ill-fated situation. In conventional setup, this agreement is unproblematic; but, its acceptance to Islamic law, or Shariah, is debatable.
Conventional Insurance Conventional insurance contains elements contradictory to Islamic Shari’ah. Gharar: “Uncertainty” The insurance contract contains uncertainty due to: * Uncertainty whether the payment will be accepted as promised * The amount to be paid is not known * The time it will occur is not known Maisir: Gambling * The participant contributes a small amount of premium in hope to gain a large sum * The participant loses the money paid for the premium when the insured event does not occur * The company will be in deficit if claims are higher than contributions Riba: Interests.
An element of interest exists in conventional life insurance products – as the insured, on his death, is entitled to get much more than he has paid Insurance funds invested in financial instruments such as bonds and stocks contain and element of Riba THE ISLAMIC INSURANCE (Takaful) ; A Remedy * Takaful is the Islamic alternative to conventional insurance * It is based on the idea of social solidarity, cooperation and joint sharing of losses of the members.
* It is an agreement among a group of persons who agree to jointly cover the loss or damage that may cause upon any of them out of the fund they donate collectively * The main purpose of takaful under the Islamic system, is to bring equity to all parties involved * The objective of the contract is to help the policy holder through bad times. * Profit earnings is not the main goal, while sharing any profits generated incidentally is acceptable The origin of Islamic insurance started before the era of the Holy Prophet Muhammad (S.A. W) which is based on “Aqilah” mutual co-operation, Later such insurance transaction was steadily practiced and was even made mandatory in some cases during the period of the second Caliph, Saydina Omar (R. A ).
In 19th century, a Hanafi lawyer Ibn Abidin (1784 -1836) was the first Islamic scholar who came up with the meaning, concept and legal entity of insurance contract. The first Islamic insurance company, known simply as the Islamic Insurance Co. Ltd, was established in Sudan in 1979.
In Pakistan first Islamic insurance company was established in 2004 and now there are three Islamic insurance companies working. CONCEPTUAL REMEDIES : TAKAFUL OVER CONVENTIONAL INSURANCE Joint Guarantee/ Taawun Takaful is conceptually defined as an Islamic financial protection system which involves a joint guarantee scheme in providing possible indemnity or contingency but conventional insurance is based on compensation of loss in exchange of premium which is paid by insured.
Takaful operation is based on the concepts of taawun (mutual help or co operation) solidarity, trusteeship, and brotherhood but conventional insurance is based on to take material gain on behalf of other In Islamic society Takaful system worked on the basis of Taawun and Tabarru. Participants mutually agree to help and guarantee each other by collecting contribution from individual, for the sake of mutual cooperation. Social Solidarity/ Shared Responsibility Takaful, the Islamic alternative to conventional insurance is based on the idea of social solidarity, cooperation and joint indemnification of losses of the members.
It is an agreement among a group of persons who agree to jointly share responsibility of loss or damage that may inflict upon any of them; out of the fund they donate collectively but in conventional setup loss is indemnified by the insurance company according to the terms and condition of the policy Concept of Aaqilah Takaful is not a modern concept in Islamic commercial law. The current jurists acknowledge that the foundation of shared liability or Takaful was laid down in the system of ‘Aaqilah’, which was an arrangement of mutual help or indemnification customary in some tribes at the time of the Holy Prophet (S.A. W).
In case of any natural disaster, every person used to contribute something until the loss was indemnified. Takaful is basically based on the idea of Aaqilah for the payment of blood money wherein payment was made by the whole tribe. Islam accepted this principle of mutual compensation and joint liability Risk Distribution The conceptual difference between Takaful and conventional insurance is that risk in Takaful is not exchanged by way of contribution payments made to operator which means operator is not selling and participant is not buying any risk coverage.
Operator is playing the role of fund manager on behalf of the participant. So operator is not undertaking risk, the risk is however, distributed among the participants who agreed to jointly assume the risk Under conventional framework Insurance is a contract between two parties, whereby first party agrees to undertake the risk of other party in exchange of premium and the other party promises to pay fixed sum of money to the first party on the happening of uncertain event with in a specific duration.
OPERATIONAL REMEDIES: TAKAFUL OVER CONVENTIONAL INSURANCE Gharar Gharar means that a contract may be done in such a way that payment will be made on the occurrence of an uncertain event outcomes . The Islamic literature uses term “Gharar” to describe risk. It is generally described as risk of loss or promise to pay money upon the happening of specified event, conventional insurance system is totally based on the theory of risk taking and uncertainty. Gharar can exist in insurance in four forms.
Gharar in the out come, Gharar in the existence, Gharar in the results of the exchange and finally Gharar in the contract period Maisir Maisir or gambling originates from Gharar and exists in insurance, since profit or loss to insurer very much depends on chances which is closely associated with claims level. Maisir, in insurance operation, resembles to a certain extent “risk taking” whereby insured got huge amount of money without an equivalent amount of input. Riba Payment and collection of interest is not permissible under Islamic philosophy.
Conventional insurance companies normally place insurance funds in Riba/interest bearing instruments such as bond and loans Investment of Funds There is no hard and fast rule from investment point of view in insurance setup. Conventional insurers may invest in such type of assets that are strictly forbidden by the Shariah such as alcohol, gambling or pork are haram. While Takaful companies invest funds in interest free avenues and with the concept of Halal-o- haram Profit Distribution.
Under Takaful contract every policyholder has the right to know how profits from different investments are divided among the participants but under conventional system there is no hard and fast rule for profit distribution, it is totally depends on company management. CONCLUSION The discussions on whether Islamic insurance is better than conventional insurance which is also not in line with the Shariah have manifold, but the widely accepted view is that takaful is a more better and a Social Solidarity/ Shared Responsibility over conventional insurance.