Insurance is an important need for businesses and individuals for mitigating risks and losses which could have catastrophic implications for both lives and wealth.

Conventional Interest

However, conventional insurance is considered against Islam as it involves interest, uncertainty and gambling. Even sometimes, insurance companies can also be involved in some other haram (forbidden) businesses such as alcohol, pork, pornography, betting, and prohibited activities.

Muslim jurists commonly agreed that the operation of conventional insurance does not comply with Islamic rules.

Takaful

Takaful is Islamic insurance which is based on the principle that individuals are responsible for helping each other. In more technical terms it is based on mutual assistance (ta’awun) and donation (tabarru). Under takaful members contribute money into a pooling system which in return get a guarantee against damages. In takaful, the risk is shared between insurers and insured.

What differentiates Takaful from Conventional Interest

The main concept of insurance, where resources are pooled to help the needy, is not against the Shari’a. However, what makes conventional insurance haram are the elements of uncertainty (al-gharar) in the insurance contract, gambling (al-maisir) is the presence of uncertainty while interest (al-riba) in the investment in interest-based assets by the insurance companies.

Al-maisir (gambling) component in the conventional insurance is that the policyholder may lose the paid premium if he does not claim, or even, he can claim a larger amount compared to his premium. However, it is not the case under takaful where the policyholders donate money to help each other in case any one of them suffers a loss.

Gharar (uncertainty) is against the Islamic rules to sell any contract involving uncertainty, doubt and probability. In conventional insurance, both insurer and the insured are unaware of the loss, amount of the loss and timing of the loss. On the other hand, in takaful, the policyholders’ fund will support if a loss occurs. But there is no guarantee from the takaful company to the policyholder. They may receive a surplus from the donations of sharing the losses and profits. The risk is shared amongst the policyholders.

Riba (interest) which mean interest paid on the money. Most conventional insurers invest in interest-bearing assets such as bonds. Takaful, businesses are not investing in any interest-bearing assets.