AbdurRahman.org [Insurance - The Illusion of Security

In this situation, what should the position of Muslims be? Does Islam allow the purchase of insurance prevalent in the market today? And what about insurance itself, is it beneficial to society or is it damaging?

This article briefly introduces the subject and provides some of its rulings from an Islamic viewpoint.

WHAT IS INSURANCE?

It is not truly known when insurance emerged as a concept or when it was first applied. Some historians claim that insurance existed in its basic form in the Roman & Greek civilizations, and that it used to have a character of cooperation. However, in its modern form the earliest known type of insurance is the commercial marine insurance that began around the 15th century.

The insurance contract is an agreement between two parties whereby one party, the insurance company or the insurer, undertakes to pay to the second part, the insured, a certain sum of money, the premium, if an accident or other specified loss occurs within a set period of time, provided that the insured pays to the insurer a certain amount of money or several installments usually less than the amount that the first party undertakes to pay. Typically, this agreement is produced in the form of a document called the insurance certificate, or the policy.

According to the type of agreement, they are typically divided into three categories:

1- Agreements where compensations against such claims are paid out in case the insured dies. (Life assurance).

According to types of risks that the insured may choose to insure against, the following groups may be mentioned:

1- General risks like economic instabilities, geographic and natural disasters, such as earthquakes, floods, etc.

2- Personal risks like death, sickness and disablement, unemployment, old age, among many others. Some classify property risks under this category, which include fire, marine, theft, etc.

3- Public liability risks like motorcars, planes and ships, public venues like theatres and stadiums, industrial units and workshop, and employers' liability to mention some.

Of course, this is just a very short list. The risks and insurance types increase continuously because the more materialistic people get the more protection they think they need for their wealth.

INSURANCE COMPANIES REVEALED - The Real Truth

Very few people are well acquainted with the reality of insurance companies, their hidden nature and secrets. A number of things are responsible for this misunderstanding, the most important of which is the extensive advertising, "propaganda," that conceals the true nature of such companies.

Had it not been for this, most people would have turned away from insurance companies. According to Hans Dietermer, a German insurance researcher, clients of insurance companies are so reluctant and perhaps unwilling to learn about the system they are dealing with despite the huge amounts of money they pay for insurance. Such an amazing phenomenon does not have a reasonable explanation so far. However, this has been attributed by experts, to the complexity of procedures deliberately set by insurance companies, and to the opacity that surrounds the approaches and methods, adopted in terms of transactions.

Experts also assert that most people are not actually convinced with the credibility of insurance, as they do not see much need for it. Statistical surveys have shown that many people get involved in the process of insurance not because of the need for it, but rather due to the legal requirements, extensive propaganda or the desire to do like others. Findings of a comprehensive survey, which covered a number of German cities such as Frankfurt, Munich and Stuttgart, showed that 85% of those enjoying the benefits of insurance had no clear-cut answer to why they had initially signed up for an insurance policy of one sort or another. In this way, the truth about insurance companies can be summarized as follows:

Conditions Set By Insurance Companies

The conditions set by insurance companies - whether clearly stated or deliberately concealed, general or exclusive - are unprecedented in the history of world business. By and large, these conditions are commonly characterized by arbitrariness. This is the reason why governments impose rigid control measures on insurance companies in order to ease or moderate the tough conditions imposed on clients. These conditions are diverse; some are concerned with periodical instalments, others with total sum of insurance, others yet with either the hazards insured against or the compensation assigned. In addition, these conditions can be commonly shared by all insurance companies, others could be exclusive to one company or even specific to a particular contract. Some conditions are well known by the majority of clients while others are unique to experts and long-time practitioners. Brend Kreshner, the author of a book called, "False Security", holds that of the hidden conditions 'substitution' is the most prominent. Substitution means that the insurance company is legally entitled to represent or replace the client when requesting -for its own benefit- a third party to make up for any loss or damage that has befallen the client's own property. This means that the rights of the affected client are invalidated. As a result, the insurance company usually takes more than it pays, and oftentimes it takes the compensation from the party causing the loss or damage, but does not pay the affected client anything. One more condition of the previous type is invalidating the client's rights when asking for refund of the insurance money paid in case of natural disasters and unusual circumstances such as wars, earthquakes, public riots, etc. In short, most of the conditions set by insurance companies are submissive in the sense that clients must have to submit to them blindly. At the same time, insurance companies have a firm hold on the client concerning the payment of due installments, while hindering any smooth delivery of his benefits or interests.

Objectives Of Insurance Companies

Insurance companies, being in the commerce business, are actually concerned with making profit. Therefore, when planning for the basic system regulating their transactions, they focus on the means more likely to bring the highest profits and avoid losses regardless of any other considerations or contradictions to religious codes. This is clearly seen in those arbitrary conditions referred to above, and in those regulator duties imposed by some governments on the citizens. For example the riba investments using the money collected from clients are done to benefit the company but not the clients. These are all indications that insurance companies are not interested in real public services as is being claimed. They do not provide the clients with the security they claim they do. In fact, one may receive exactly the opposite, just ask those who had to go through claiming their legitimate insurance about how terrible their experience was.

Insurance Contracts Between Face Value & Reality

Many people believe that once they sign a contract with an insurance company against a particular risk or hazard, they become totally secure and safe. This is a popular fallacy that is getting to be understood more and more. Such a concept underlines a clear example of the misunderstanding of the truth about insurance contracts, which are persistently protected by advisers, lawyers, doctors and other whose main job is to invalidate any lawsuit filed against the insurance companies they work for. Nowadays, more than before, it has become easier for insurance companies to nullify a contract (for a client) and absolve themselves from all obligations and duties. Unusual circumstances, according to the system, are usually a means to free a company from its responsibility. In addition, any slight delay on the part of the insured in the payment of the stated instalments is a sufficiently strong pretext to invalidate a contract. The conditions are so tough and tight that only very few can observe them to the letter. And the loopholes in a contract also make it easy for insurance companies to find excuses not to fulfil their commitments. They always talk big, but they do little. According to the Federal Bureau of Statistics in Germany, the figures show that in 1984 of one million insured work accidents, only 2.9% received compensation. It can be concluded then that unless obliged, or rather forced by influential persons, insurance companies hardly ever honour a contract or fulfil a commitment.

THE IMPACT OF INSURANCE ON PEOPLES LIVES

As mentioned earlier, attractive propaganda and colourful advertising have made many people believe that insurance is all-good. However, the benefits of insurance are outnumbered by a great many minuses.

Advantages Of Insurance

1 - Raising Capital

The best way to raise capital is to invest your money in an insurance system. Insurance has become a part of all kinds of business, be it insurance against life, against private property, against funds, against rights or even against aspirations and dreams. Individuals and governments in modern times assign a big portion of their annual budgets to insurance cost so much so that lack of insurance (because of its large cost) can cause enterprises to shutdown. This is because insurance experts are constantly adding new risks and hazards to the already long list of dangers deserving insurance and thus, the budget assigned to these particular items is increasing day after day. Consequently, huge amounts of money find their way to insurance companies.

2 - Maintaining Production Elements

If a factory goes on fire, blows up or collapses; and if a worker falls ill, becomes handicapped or dies and there is no insurance against any of these misfortunes, production elements including physical plant facilities and man power may weaken or cease altogether. Insurance experts believe that investing in their various system is likely to prevent these grave consequences since insurance policies make up for damage and loss of machinery as well as manpower. A devastated factory can be rebuilt, damaged machinery replaced, ill workers treated, the handicapped rehabilitated, and a good sum of money given to the deceased-person family.

3 - Controlling Economic Balance

Many countries often suffer from economic imbalance between supply and demand. In one instance, people tend to have more money than the supply of goods available on the market, which means that the economic balance will be disrupted, leading for inevitable inflation. The reverse can occur when the supply of goods is more than can be afforded by the majority of people. In either case, the economy is said to be unhealthy. Insurance experts claim that their system is the only way out of that dilemma because obligatory insurance, especially when collected under the name of social insurance, can lower the rates of inflation, excess money is usually withdrawn from the budgets of individual citizens, and so balance between supply and demand can be maintained. In cases of depression, money can be re-pumped into people's budgets; and so the portions assigned to healthcare, unemployment, etc. can be insured.

4 - Protecting Against Dangers

Insurance companies want their clients to avoid misfortunes and/or disasters or else they will be obliged to pay the insurance money stated in the contract. Therefore, they keep urging their clients to take the strictest measures possible in order to avoid being exposed to hazards. By doing so the money and assets being insured are usually watched closely and thus maintained safely most of the time. This leads to the enforcement of the power of the economy.

5 - Security & Peace Of Mind

It is often maintained that insurance is synonymous with security and peace of mind. Factory owners are sure of their success and promotion, capitalists are sure of profitable investments, whole-dealers as well as retailers are sure of safe deliveries of their own goods. The same applies to businessmen, employees and workers, they all work in an atmosphere of serenity because they feel that their interests are insured.

Disadvantages Of Insurance

Careful examination of insurance will reveal many disadvantages, the most important of which are:

1 - Caught In Forbidden Deeds

Nothing can be more harmful than committing a deed that is contradictory to what has been decreed by Allah and His Messenger, sallallahu alayhe wa sallam. The effect of committing a sin of that type knows no bounds, good fortune and prosperity are uprooted in this world, humiliation and torture in the hereafter. And since insurance is based on unlawful principles a will be shown next, it is haram to deal in.

2 - Economic Loss

A considerable amount of money goes into insurance funds worldwide. This means that within a society the majority are losers and the minority are winners. Such a tendency is not practically justified since fortunes are thus wasted without tangible benefits. The exceptions to this widespread phenomenon constitute a meagre figure that can hardly be compared to the number of people holding insurance policies. This can be clarified by the following equation: The sum paid by those holding insurance policies equals the profits of the company plus administrative cost plus the refund paid to those affected. The loss brought about by insurance is now obvious because it is well known that the profits made by insurance companies are among the highest in the world of business. The administrative costs are even higher since they include the generous bonuses granted to directors, commissioners and officials in charges as well as those agents whose job is to write tailored reports on the incidents being investigated. They also include the high rent paid for the plush offices occupied by the insurance agencies, to say nothing of the extensive advertising conducted all year long. As for the money paid against any accident, it constitutes a trivial percentage when compared to the money collected; it does not amount to more than 1.3 of the total budget of any insurance company.

3 - Loss Of Revenue

As far as insurance is concerned. Countries of the world are divided into two categories: export-oriented and import-oriented. The winner side is the exporting countries. These take the most and return the least. The reference here is to those big countries that own the renowned insurance companies all over the world whose budgets are like a spider net, which entangles the interests of the poor countries.

4 - Destruction Of Insurance Properties

Very often some of those holding insurance policies deliberately destroy the properties insured against in order to get a refund, especially when the market is in a state of depression or when the goods are about to get expired. At other times, the goods are sold but empty or expired packages are put in their place and accidental fire is staged so that a refund is paid. Also, such crimes can be attempted to take revenge of the insurance company, particularly when the person concerned has paid a lot of money. And because such fraudulent accidents are common, insurance companies conduct very tough investigations to make sure that they are not deliberately contrived.

5 - Fortunes Only For The Few

When fortunes seep through into the pockets of a few persons or agencies, evil prevails and negative consequences become a phenomenon. As a result, discrimination according to social classes is inevitable because people from the upper class will have full authority, over the frustrated sectors of the community they live in. Personal interests are then the criteria that steer the entire nation. For this reason, Islam has forbidden the notion of fortunes being heaped up in the hands of a minority; and insurance in an obvious example of such a case.

6 - Increase In Crime

Because of the temptation of money on the part of those deserving the refund when the original holder of the insurance policy passes away (according to degrees of kinship, or as stated in a will) many people would not hesitate to commit murder or other ruthless crimes to get what they believe they are entitled to. Strangely enough, insurance which is meant to make people feel safe and secure becomes a prime source of threat and danger. One of those convicted of murder put a time bomb in a wrapped gift which he gave to his mother on her birthday. The mother who was one of the passengers on a plane that day was torn to pieces in the air together with dozens of innocent victims who had nothing to do with the matter.

7 - Loss Of Rights

Insurance companies employ scores of the best lawyers in order to defend their interests. Such legal advisers have become experts in knowing how to invalidate the clients' evidence when lawsuits are filed against the insurance company. Doctors and judges are also offered big bribes so that they can find the appropriate Loopholes that are likely to nullify the prosecution.

8 - Corruption Of The Soul

According to a statement common in any insurance policy, the person insured against cannot possible admit that he is the one at fault whenever an accident befalls him. In this way, he is forced to lie to the other party involved with him, or else he would not get any refund. The insurance system, therefore, obliges people to make false allegations before courts of law, and so a lawsuit will go on for years before it can be settled.

9 - Scaring People

One of the strongest motives behind enrolling in one form or another of insurance is the instinctive fear from the future. Insurance companies tend to make an optimal use of that instinct, amplifying it to the extent that it becomes a daily obsession. Besides, they draw a picture of themselves as the only refuge people can take to protect against likely perils. Thus, people lose confidence in themselves, an evil sentiment that can never be encouraged by reason; and that is why it is considered against religion.

10 - Inability To Face Challenges Of Life

When people eventually develop a tendency to shake responsibility off themselves, they lose the ability to face the slightest dangers. They became so feeble that only a causal surprise can disturb them. And life has no taste when it turns void of challenges since the sense of triumph is likely to be lost. This is even truer in this age when life has developed into an intricate system of mutual interests governed most of the time by evil intentions.

11 - Loss Of Social Ties

Social intercourse is inevitable, especially during hard times when people experience a disaster. Therefore, people have been living in communities based on co-operation since they existed on earth. Relief efforts have always been a necessity. Integration among members of the same community creates intimacy. Nevertheless, insurance has blurred the image; integration was replaced once and for all by disintegration, thus destroying the structure of the nucleus family as well as the community. People have become isolated, each looking after his own interests.

THE ISLAMIC RULE CONCERNING INSURANCE

Our belief as Muslims is that in this world everything happens according to the Will of Allah. Therefore, any accident or misfortune that befalls us, is by the will of Allah, subhanahu wa ta'ala.This belief however should not be construed to mean that people should not plan or do whatever they can to take care of responsibilities and provide for their needs. "Leaving it to Allah" as some may say, does not mean we should not be prepared. We do not know the future but we should plan for it. What is extremely important for us to know is that whatever planning and preparation we do has to be done according to Shari'ah. And Shari'ah has taught that while we should accept whatever "misfortune” that befalls us, we are also required to avoid or reduce the possibility and/or the effects of these "misfortunes" by taking positive steps.

Anas ibn Malik reported that one day a Bedouin came to the Prophet, sallallahu alayhe wa sallam, on a camel and asked him: "Can I leave the camel alone [without tying it down] and trust in Allah?" The Prophet, sallallahu alayhe wa sallam, said: "Tie your camel first, then put your trust in Allah." (Termithi) Here, we saw that the Prophet, sallallahu alayhe wa sallam, has taught the man to reduce the risk of losing his camel. Imam Ibn Rajab said:

"You should know that having your trust in Allah does not mean abstaining from taking the necessary measures to take care of something. This is the Sunnah of Allah and His Law in this life. So using the means available to us is being obedient to Him and having trust in Allah is having faith in Him."

Similarly in many actions of the Prophet, sallallahu alayhe wa sallam, one can see that whenever possible he took the necessary steps to reduce risks although he could have done otherwise if he wanted to. For example, during the Hijrah, he went to hide in the cave first instead of going straight to Madinah. He commanded the companions to migrate to Madinah by batches instead of in one big group. Again this is to reduce risks. When he went to war, he put on his armor on instead of wearing his normal clothes.

In this modern world, one of the ways that can be done to reduce the risk of loss due to accident or misfortune is through insurance. But what type of insurance is permissible for the Muslim to use?

1 - Commercial Insurance

As mentioned before the insurance contract is a "new" type of financial dealing that was developed in the absence of a Shari'ah guidelines and for this reason it is only natural for it to be un-Islamic. Recently, however, insurance has been the subject of discussion and research by scholars. The conclusion of their majority is that insurance is prohibited or Haram. Since the Malaysian National Fatwa Council decreed that insurance is a unlawful or Fasid practice in 1972, many other council meetings and conferences have taken place in Libya (1973), in Makkah (1976 and 1977) and more recently in 1985. Furthermore, many scholars have published their own treatises and fatawa on the subject in various capacities. All of these studies prohibit the involvement in the current version of the commercial insurance because it contains the elements of Gharar, Maisir and Riba.

GHARAR

According to scholars, gharar is defined as deception through ignorance by one or more parties to a contract. Also, it is defined as a contract where the results are not known or hidden, or one of two possibilities where the frequent occurrence is the one that is more feared. Therefore, every contract of an open-ended nature contains some element of gharar. And the insurance contract is one of exchange whereby the insured pays a premium and the insurer provides compensation, but it is not known, at the time of consent for the contract, how much either side will eventually have to pay to the other, and therefore, the element of gharar is present which voids the validity of the contract. The Qur'an says:

"O who you believe, do not eat property among you in a false way, except through trade by mutual consent." [4:29]

MAISIR

Maisir is a form of gambling. It is about getting something for nothing, or receiving profit without working for it. The Prophet, sallallahu alayhe wa sal-lam, prohibited all forms of business dealings where monetary gains come from chance and speculation, and not from work. Simplistically, The insurance contract is equated with gambling where if the danger happened, the insurer will lose. On the other hand, if the danger does not occur, the insured will lose. Today, the insurance company is the winner in most of the cases. Insurance companies rely heavily on statistics and past experiences to determine the cost to insure an unknown risk while making large profits.

RIBA

One of the obvious forms of dealing in riba is the giving or receiving of interest. It is generally agreed upon, amongst scholars, that interest whether on principal or late payment is riba. Another form of riba is the exchange of "elements of riba" where there is a difference in time and/or quantity. A main type of the elements of riba mentioned by the Prophet, sallallahu alayhe wa sallam, are gold for gold, silver for silver. By making an analogy, money is similar to gold and silver where it is a medium of exchange. Therefore, money is an element of riba and in the contract of exchange between the insurer and the insured there is difference both in quantity and amount. Thus, one can easily see that both types of riba exist in the commercial insurance. It actually is dependent on riba for its profits. Riba is present in all stages of the business, from the calculation of premiums to the payment of indemnity to the insured who has suffered a loss. Furthermore, the scholars argued that insurance companies give out loans and charge interest and this is Riba. Also, Most of a conventional insurance company's funds that are collected in premiums are invested in fixed income (interest-baring) securities such as bonds and US Treasuries, only a small portion of its funds are invested in other areas. Since safety and the welfare of its clients/shareholders are the company's main concerns, it invests in these types of securities because it considers them "risk-free".

These are the main issues that made commercial insurance to be haram for the Muslim to get involved in. However, it should be noted that the scholars have also stated certain conditions under which one may be allowed to buy insurance. A state of Dharoorah or necessity is one such case. It is highly recommended that one consult with a scholar before committing to buying insurance for "allowed situations" and "Allowable conditions" can only be determined with qualified scholars.

2 - Cooperative Insurance

Now that we saw that insurance is haram, what can be done about it? What should Muslims do to plan and be prepared for dangers that may happen in the future? Is there such a thing as insurance that conforms to Shari'ah?

One solution many scholars have mentioned repeatedly was the suggestion that the principle of Takaful be the basis of "Islamic" insurance. It is know called the cooperative insurance or takaful. Takaful comes from the word Kafala meaning guarantee. It also, means Ta'awon or mutual assistance. So Takaful means mutual guarantee, assistance and protection.

Under this principle, the participants to the plan would give their money to the company on the basis of donation or Tabarru' with the stipulation that the company would compensate them with an amount should they be struck by an accident for example. They further stipulated that the company must not be involved in haram activities like riba, gambling, liquor and the like.

One main difference between modern commercial insurance and cooperative, takaful, insurance is that in conventional insurance, losses are estimated in advance and are not shared by its members. In takaful, losses are not estimated in advance and are shared by the members when they happen. In other words, individual members are the insurers as well as the insured.

It is a collective, community-based organization designed to eliminate the burden of individual losses by mutually sharing the risk. No risk is transferred from one to another and there is no exploitation, or enrichment of one person at the expense of another. If some of the money is invested for profit-making, all profits and losses are equally shared by the members.

Insurance - The Illusion of Security