Insurance and Islam

Islam has guidelines for how Muslims should practice their everyday lives. Among other things, Islam has guidelines for how Muslims should manage their finances. In the event of an accident, e.g. fire, theft, water leakage, insurance can greatly affect the finances of the individual. Insurance is a part of life in the Western society we live in. For example, car insurance is required by law, when taking out a loan to buy a house, home insurance is required, etc. When such requirements arise, we Muslims often purchase insurance without thinking much about how such actions are in accordance with Islam. In principle, insurance is not permitted in Islam, and we will now look more closely at the reasons for this.

Insurance contains elements of both interest (riba) and gambling (qimar). Interest is an element that is related to the profession of insurance, and as many already know, interest is not permitted in Islam. Thus, insurance is also considered not permitted.

Islam has guidelines for how Muslims should practice their everyday lives. Among these, Islam has guidelines for how Muslims should manage their finances. In the event of an accident, e.g. fire, theft, water leakage, insurance can greatly affect the finances of the individual. Insurance is a part of life in the Western society we live in. For example, car insurance is required by law, when taking out a loan for a house purchase, home insurance is required, etc. When such requirements arise, we Muslims often go to purchase insurance without thinking much about how such actions are in accordance with Islam. In principle, insurance is not permitted in Islam, and we will now look more closely at the reasons for this.

Insurance contains elements of both interest (riba) and gambling (qimar). Interest is an element that is related to the profession of insurance, and as many already know, interest is not permitted in Islam. Thus, insurance is also considered not permitted.

The fact that insurance is gambling can be explained in the following way: When entering into an insurance contract, it is agreed that one will pay a price for the agreement. The repayment of this amount, however, is uncertain. In the event of an accident, one may experience getting back more than what one paid. On the other hand, one may also experience getting nothing in the event of an accident, so that one may end up in a situation where one pays into an insurance company without getting anything back. Such a situation, where there is uncertainty about what the outcome of the contract will be, can be described as a game of chance and thus becomes gambling.

The way the insurance system is structured in the Western world also contradicts another principle in Islam, which is “al-gharar”. This means that if a contract is designed so that if one party loses, the other wins and vice versa, then it can be defined as gharar. Most insurance companies in the West are in the form of joint-stock companies, and their purpose is to make money for their shareholders. This can create conflicting interests in relation to gharar. A company will make money at the expense of consumers paying into the insurance company without necessarily getting anything in return in the form of material values. In this way, the insurance company will make money based on a business model that is gambling. Accidents are random and can therefore be described as games of chance. One year there may be little damage, and thus consumers will not get any of their payments back and the insurance company will win on this bet. What is the difference between such a business and playing at a casino, which is also governed by chance?

This not only requires Muslim consumers not to purchase such insurance contracts, but also investors who invest in insurance companies. Investors’ earnings will be based on chance (and gambling), and thus this is also contradictory according to Sharia.

After reading this, many Muslim brothers and sisters will think that the idea behind insurance is to protect the simple consumer against accidents, which the resourceful insurance company helps with. In the event of an accident, e.g. a house burns down, the insurance company will pay to rebuild the house. In this way, the consumer with his limited financial resources will not be financially ruined. Why is it contradictory according to Sharia anyway? The reason is mainly as mentioned above that it is not allowed to profit from accidents, which insurance is based on. It is worth noting that this description of the insurance business is as it looks today, and which stems from business models that are not inspired by Sharia law.

Since the dawn of time, individuals have needed to protect themselves against financial ruin, and have found solutions that have worked. Some of these can be somewhat comparable to today’s insurance world. From the time of our Prophet (peace and blessings of Allah be upon him), it was common to have systems where a group of Muslims came together and helped each other if an accident occurred. Such a system, which is based on a group of people taking responsibility for each other’s finances if an accident were to occur, is called “aqila”. This was also practiced among Muslims in Makka (muhajirin) and Madina (ansar), and some also believe that this was the basis for the idea behind mutual insurance. In such a case, the members of the system have mutually insured each other. If an accident occurred, it affected everyone and not just one individual. Such a system based on mutual accountability is not contradictory according to Sharia, and is accepted by both Muslim jurists and our beloved Prophet Muhammad (peace and blessings of Allah be upon him) in his time. We call such a system Islamic insurance.

Islamic insurance was first established in the early first Muslim century. This was a time when the Arabs were expanding their trade to India, the Indian subcontinent (now Indonesia, Malaysia and the Philippines) and other Asian countries. On their long trading voyages, they experienced accidents and piracy, which resulted in heavy losses. Then the traders came together and established a solution to this, which was based on Islamic principles of mutual aid and cooperation to do right and decent things. The solution was to establish a fund where they deposited funds before starting their journey. The fund was used to pay for compensation to members who experienced losses due to accidents during the voyage. Later, this model was copied by Europeans, and after a while it became more known as marine insurance.

In summary, it can be said that there is agreement that insurance that is based on solidarity and where several individuals come together to take mutual responsibility for each other is in accordance with Islam. However, if it is an insurance where one wants to gain from the loss of the other, it is not in accordance with Islam.

We who live in Norway experience that legislation and the system mean that we have to enter into insurance contracts in order to get anywhere at all, literally. For example, when you buy a car, you have to take out so-called liability insurance on the car in order to be allowed to drive on the roads. In a situation where you are required to enter into an insurance contract due to legislation in the country, it is permissible to enter into such a contract according to Sharia if you have no other choice. It is worth noting that such a contract must be imposed by the authorities and is not entered into voluntarily.