Insurance in Islamic Law

Insurance in Islamic Law

Difficulties with Commercial Insurance in Islamic Law

Commercial Insurance in Light of Islamic Commercial Law

Islamic Law prohibits business transactions that include a great deal of uncertainty. For example, I cannot sell you an unspecified quantity of peanuts for a fixed amount of money. The amount of peanuts must be specified. I cannot sell you a car for a certain sum of money without the make and model of the car being agreed upon beforehand. 

There are many authentic hadîth in this regard. For instance, Abû Hurayrah relates that Allah’s Messenger (peace be upon him) forbade business transactions determined by the throw of a stone and business transactions involving uncertainty. [Sahîh Muslim] 

Insurance is the sale of uncertainty itself. This is the strongest reason for its prohibition, since insurance is effectively the sale of a commodity that Islamic Law does not recognize as saleable. You pay the company to assume some matter of uncertainty in your life on your behalf. In life insurance, for example, you pay a fixed premium each month – say $200 – under an agreement that if you die, the company will pay out – say $75,000. If you die in one month, then the company has to pay you $75,000. If you live for forty years, you will have to pay them $96,000. If at that point you fail to continue to make your payments, your policy is cancelled and you get nothing back. Why is this? It is because you received for your $96,000 the benefit of their assuming your risk for you for those forty years. So you received, according to law, the commodity that you paid for during all those years and the company owes you nothing more. 

There are other problematic areas with respect to insurance, though these are far less important than the one just mentioned. In many instances, insurance resembles a type of prohibited interest (ribâ al-fadl), where two parties exchange the same commodity – gold, silver, dates, etc – in unequal quantities. Taking another look at our life insurance example above, assuming that you were to die one month into your policy, this would mean that you paid them $200 dollars and they paid you $75,000. Since Islam does not recognize the assumption of uncertainty as a salable item, this becomes an example of exchanging a like commodity (money in this case) in an unequal manner. 

Another problem with insurance is that it bears some resemblance to gambling. This comes as a consequence of the uncertainty inherent to the business of insurance. Insurance premiums are set based on the percentage chance that the individual policyholders will collect from their insurance. The company makes its profits by receiving more money from its customers than it pays out to those who deserve to collect. In a somewhat similar manner, a gambling casino earns its profits by calculating probabilities to ensure that its receipts exceed the winnings that it is liable to pay out.