Insurance in Islamic Law
Difficulties with Commercial
Insurance in Islamic Law
Prepared by the research committee
Published on http://www.islamtoday.com
The question of insurance is a major concern of
contemporary Islamic jurisprudence. Insurance is an important part of the modern
business environment and it plays a vital role in today’s economy. In some
cases, people are required by law to take out insurance of one form or another.
Many countries make owning automobile insurance a precondition for owning a
driver’s license or subscribing to group health insurance a precondition from
being allowed to employ others. Financiers often will not loan money unless the
property being used as collateral for the loan is insured against loss.
Moreover, people can see that there are clear and undeniable benefits to be had
from taking out an insurance policy. An insurance policy provides its holder
with a measure of financial security. If a person has health insurance, he can
be reasonably confident that medical care will be available to him. If a person
has homeowner’s insurance, he is very likely not to be homeless if his house
For these reasons, Muslims are naturally quite concerned about the
permissibility of this kind of business and to what extent they can participate
in it. It is one of the most extensively discussed of contemporary issues in
Islamic Law and at the same time one of the issues that is most often
misunderstood by the general Muslim public.
The purpose of this article is to dispel the commonly held misunderstandings
surrounding this issue and to explain exactly why Islamic Law has so many
difficulties with commercial insurance. In order to do this, it is necessary to
have a correct understanding of what commercial insurance is.
What is Commercial Insurance?
An insurance policy is essentially a contract between two parties whereby one
party (the policyholder) pays a fixed premium to another (the insurer) in return
for the insurer bearing full or partial responsibility for possible financial
losses incurred by the policyholder.
There are many different types of insurance policies. There is life insurance.
This is where a person pays a fixed premium to an insurer so that in the event
of the death of the person insured, a predetermined sum of money will be paid by
the insurer to a stated beneficiary or beneficiaries, who are usually the
dependents of the insured party.
There is health insurance, whereby the policyholder pays a fixed premium to an
insurer so that the insurer will bear fully or partially the medical costs
incurred by those covered by the policy.
There is liability insurance. The policyholder pays a fixed premium to an
insurer who agrees to bear the full or partial costs of any losses incurred by
the policyholder on account of legal liability.
Other forms of insurance can be taken out against the destruction, theft, or
loss of specified property.
All insurance policies share in there being a payment of a fixed sum of money to
a party in lieu of that party assuming responsibility for a financial loss that
may or may not take place and that may or may not exceed the amount that was
Clarifying Some Misunderstandings
Some people have tried to compare insurance to the practice of al-`âqilah.
This is where the tribe of a person found guilty of murder or manslaughter is
held collectively liable to pay the blood money to the victim’s next of kin.
This is very different from the insurance that we are discussing. This is purely
an issue of legal accountability and is not a commercial contract between two
Another common misconception that people often have is to assume that insurance
is prohibited in Islam because it somehow compromises a person’s faith and his
reliance on Allah. They allege that by taking out an insurance policy, the
policyholder is displacing his trust in Allah and instead relying on the
This argument is not sustainable. As Muslims, we are commanded to consider
natural causes and to take necessary precautions. This in no way compromises our
reliance on Allah. We know that our providence comes from Allah. However, we
must still go out to work and earn a living. We do so relying upon Allah, by His
grace, to provide for us from the fruits of our labor.
We are commanded by our religion to take precautions against loss. Anas ibn
Mâlik reported that one day a Bedouin riding a camel came to the Prophet (peace
be upon him) and asked him: “Can I leave the camel alone and trust in Allah?”
The Prophet (peace be upon him) replied: “Tie your camel first, then put your
trust in Allah.” [Sunan al-Tirmidhî]
The issue with insurance is not a matter of a person’s reliance on Allah. It is
purely a matter of Islamic commercial law. And this is where the problems arise.
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.