ISLAMIC RISK MANAGEMENT

AND PLANNING

Presented By:
Anuar Shuib
PRESENTATION OUTLINE

• Introduction to Risk Management

• Concept and Classification of Risks
• Risk Management from Islamic Perspective
• Basic Risk Management
• Communal and Commercial Approach of Risk Sharing
•
• Introduction to Takaful
• Overview of Takaful
• The Principles of Takaful
• Applicable Contracts in Takaful
• Takaful Models in Malaysia
•
Introduction to Risk Management

• Concept and Classification of Risks

• Risk Management from Islamic
Perspective
• Basic Risk Management
• Communal and Commercial Approach of
Risk Sharing
Concept and • Definition of Risk
Classification
• Risk is the possibility of suffering loss
of Risks • Uncertainty of any outcome
•
What is a Risk?

• Possibility or uncertainty of loss.

• If a loss is certain to occur, it may be planned for in
advance and treated as a definite, known expense.
– E.g. Taking the this Program
Meaning & Perception of Risk

▪ Danger
▪ Unexpected Occurrence
▪ Unpleasant Outcome
▪ Undesirable Consequences
▪ Negative Implications
▪ Death and/or Injury
▪ Opportunity
▪ Associated with Insurance/Takaful
• Risk & Uncertainty

• Concept of Risk
• Indeterminacy (at least 2 possible outcomes)
• Adversity (at least one of the outcomes is
undesirable)

• Uncertainty as Doubt
• The feeling of being uncertain/unsure of
potential outcome
• Probability Theory
• Probability – An area or study which
measures the chance of occurrence of a
particular event

• Decision Theory
• Risk decision under condition of uncertainty
Risk Measurement
▪ Using the probability of occurrence of a particular event
through:
▪ Priori probability – is determined when the total number of
outcomes is known. It is based on chance e.g. tossing of a
coin (50:50), rolling of dice (1:6).
▪ Empirical probability – is determined on the basis of
historical data. The more the data, the more realizable the
result. Example, Mortality Table.
▪ Judgmental probability – is determined based on the
judgment of the person predicting the outcome.
Planning
&
organizing

Minimize the
Controlling
adverse
Asset &
Activities affects of
unexpected
loss

Analysis &
Identification
of Risk
Risk & Chance

• Risk – possibility of loss or no loss.

• Chance – possibility of loss, no loss or gain.
Classifications of Risk

• Pure Risk versus Speculative Risk

• Specific Risk versus Catastrophic Risk
• Static Risk versus Dynamic Risk
• Subjective Risk versus Objective Risk
 Pure Risk versus Speculative Risk

Pure Risk

• Exist when there is the probability of either loss or no loss.

Speculative Risk

• Exist when there is the probability of loss, profit or

breakeven will happen e.g. Credit Risk, Investment Risk,

▪ Insurance will not insure this type of risk.

▪ However, risk management will handle this type of risk.
Type of Pure Risk

1.Personal Risks – involve the entire loss or decrease of

earned income, additional expenses and the devaluation of
amassed property of an individual due to death disability and
health reason

2.Liability Risks – Involve losses due to legal actions taken by

other party that has been injured by an individual.

3.Property Risks – Involve the risk of damage to property

owned or loss of property due to some causes
 Specific Risk versus Catastrophic Risk

Specific/Particular Risk

• Affecting one particular person e.g. staff being robbed or

involved with accident

Catastrophic/Fundamental Risk

• Wide spread. Affecting large number of people e.g. SAR,

Hurricane or Tsunami
 Static Risk versus Dynamic Risk

• Involves the extent to which uncertainty changes over time.

▪ Business undertakings in a stable economy
• Dynamic risk are produced because of changes in society.
• Dynamic risks also can be either pure or speculative.
▪ Complex technology,
▪ Changing attitudes of legislatures and courts
 Subjective Risk versus Objective Risk

Subjective Risk
• Refers to the mental state of an individual who experiences
doubt or worry as to the outcome of a give event.
• Psychological uncertainty that arises from an individual’s mental
attitude or state of mind.

Objective Risk
• More precisely observable-and measureable.
• Probable variation of actual from expected experience
Risk
• Uncertainty, probability or possibility of loss.
• Exposure to danger.

Peril
• Causes or sources of loss e.g. fire, flood, collision, etc.

Hazard
• Condition that increase the chance of loss.
▪ Physical hazard – condition stemming from the material
characteristics of an object e.g. poor mechanical condition of
a car.
▪ Moral hazard – stems from an individual’s mental attitude e.g.
dishonesty
▪ Morale hazard e.g. carelessness
 Distinguish Risk from Peril and Hazard

Hazard Peril Loss

Property
Explosive Explosion
Damage
Insurable Risk

• Pecuniary value – the risk must involve a loss that is capable of

financial measurement where monetary compensation. Not
Sentimental value.
• Homogeneous Exposure – there must be a large number of similar.
• Pure risks – only pure risk are insurable as insurance.
• Particular risk – only particular risk are insurable insurance if they
satisfy other criteria of insurance risk. Fundamental risks are
generally uninsurable – e.g. War.
Personal Risk

Involve the entire loss or decrease of earned income,

additional expenses and the devaluation of amassed property
of an individual due to death disability and health reason

➢ Risk Associated with Premature Death

➢ Risks Associated with Superannuation
➢ Risks Associated with Disability
➢ Risks Associated with Medical Ailments
Liability Risk

In Involve losses due to legal actions taken by other party that

has been injured by an individual.

➢ Bodily harm
➢ Damage to 3rd party property
➢ Damage to 3rd party reputation
Property Risk

Involve the risk of damage to property owned or loss of

property due to some causes

➢DIRECT LOSS – A financial loss that results from the

physical damage, destruction or theft of the property

➢INDIRECT LOSS – A financial loss that results indirectly

from the event of a direct loss of the property
 • What is Risk Management?

• As the identification, analysis and economic control of all those risks

that threaten the assets and earning capacity of an enterprise
• Source:
Basic Risk • (Risk Management by Chartered Insurance Institute, UK, 2001)

Management
• A systematic approach in dealing with risks that threaten assets and
earning of a business or enterprise
• Source:
• (Malaysian Insurance Institute)
 Evaluate Select
Loss potential method

Implement Monitor results

Selected /
method Modify methods

Identify
exposures
 IDENTIFICATION
MEASUREMENT
DECISION

RETAIN REDUCE TRANSFER

FUNDED AVOID RISK INSURANCE NON INSURANCE

REDUCE
NON FUNDED CONVENTIONAL HEDGING
PROBABILITY

REDUCE COST TAKAFUL CAPTIVE

CONTRACTUAL
Identify exposures and perils

• That can lead to potential financial loss.

– Exposure : possessions and activities that can lead to loss (life -

> regular income)

– Peril : an actual event that causes the loss (death -> loss of
future income)
 Methods of Dealing with Risk

• Risk Avoidance
• Risk Retention
• Risk Reduction
• Risk Transfer
Risk Avoidance

• Reducing or eliminating risk through behavior

modification
– Occupation
– Hobbies
– Lifestyles
Risk Retention

• Accepting risk as the least costly, best course of action

– Can you retain the risk or do you need takaful?
– Can you pay for the risk?
– If you are permanently disabled can you survive?
Risk Reduction

Reducing the probability of loss

through preventive action
Non-smoking
Risk Transfer/Sharing

• You share with/give someone else the responsibility to pay

for the loss:
- Insurance/Takaful
 • Surah Al Baqarah verse 240 – 242

• Meaning: “Those of you who die and leave widows should bequeath for them a
year’s maintenance without causing them to leave their homes; but if they leave the
Risk residence on their own, there is no blame on you for what they chose for themselves in
a fair way. Allah is Mighty, Wise. Reasonable provisions must also be made for
divorced women. That is an obligation upon those who fear Allah. That’s how Allah
Manageme makes His Revelations clear to you so that you may understand.”

nt from • Surah Al-Maidah, verse 2

Islamic • Meaning: ”and help each other in righteousness and piety, and help not one another
in sin and transgression….”

Perspective • Surah Yusof, verse 67

• Meaning: “O my sons, do not enter from one door; enter through separate doors.
However, I cannot save you from anything that is predetermined by Allah. To Allah
belongs all judgment. I trust in Him, and in Him shall all the trusting put their trust.”
Protection from Islamic Perspective Lessons of the Hadith

Meaning: (related to Bequest)

”Narrated Sa'd bin Abi Waqqas : …. it is better for you to leave your off-
spring wealthy than to leave them poor, asking others for help...”
(Narrated by Bukhari dan Muslim)

Meaning: (related to Risk Treatment)

“The Prophet (s.a.w.) told a Bedouin Arab who left his camel untied to
the will of Allah : Tie the camel and then leave it to the will of
Allah”(Narrated by Tarmidzi and Ibn Majah)
Saving for Protection (related to at Tanahud)
• ‫قال أبي موسى عن‬: ‫جمعوا ما كان عندهم بالمدينة في الغزو أو قل طعام عيالهم أرملوا إذا األشعريين إن صلى هللا عليه وسلم قال النبي‬
‫في ثوب واحد ثم اقتسموه بينهم في إناء واحد بالسوية فهم مني وأنا منهم‬. (‫)صحيح البخاري في الباب الشركة‬

• Meaning: Narrated Abu Musa, The Prophet said, "When the people of Ash'ari tribe ran short of food during
the holy battles, or the food of their families in Medina ran short, they would collect all their remaining food in
one sheet and then distribute it among themselves equally by measuring it with a bowl. So, these people are
from me, and I am from them."

• ‫صلى هللا عليه وسلم قال النبي‬: ‫)متفق عليه \عن عبادة بن الصامت (رحم هللا امرأ اكتسب طيبا وانفق قصدا قصدا وقدم فضال ليوم فقره وحاجته‬
Story of Prophet Yusof

Surah Yusuf : 43

Meaning: One day the king said: "I have seen a dream that there are
seven fat cows, whom seven lean cows are eating, and there are
seven green ears of corn and other seven are dry. O people of the
court, tell me the interpretation of this dream if you understand the
meanings of dreams."
Story of Prophet Yusof

Surah Yusuf : 47-48

Meaning :
Yûsuf said:"You people will keep doing cultivation for seven
consecutive years. During this period whatever you harvest from it only
take that much which is sufficient for your food, and leave the rest in
ears of corn. Then seven very hard years will come. In that period all
this grain will be eaten-up which you will store for that time. If
anything would be saved that will be only what you have reserved (left
in ears of corn).
 Communal and Commercial
Approach of Risk Sharing
• Traditional Approaches
• Practices of al-Aqilah by ancient Arab tribes – A pool of
money to pay blood money on behalf of killer to
compensate the heirs of the victim. The contribution to
the pool is made by tribe members.
• Practices of Khairat Kematian by Malaysian Muslims – A
pool of money to pay burial expenses, etc on behalf of
the deceased. The contribution to the pool is made by
the deceased during his lifetime. Usually contributors
belong to a common surau in a residential area.
• Problems with Traditional Approaches
• The fund is not managed by professionals.
• Record keeping is not properly maintained.
• The amount collected is minimal, enough for burial
expenses.
• The participants are limited and restricted – cannot
achieve economy of scale.
• Communal approaches do not satisfy the many needs of
society e.g. loss of income of breadwinner, loss of
property, etc.
• Commercial Approaches
• Arising from shortcomings of traditional communal
approaches, society has come up with commercially
driven approaches known as Takaful scheme.
• Takaful schemes are run by Takaful operators.
• Some Takaful operators run the scheme by way of
Mudharabah, Wakalah or hybrid.
•Commercial companies are better manager
of Takaful scheme because:
• Commercial companies can attract
professional managers with availability
of profit. Continuity of the manager
running the Takaful schemes is more
assured since companies have infinite
life.
• Economies of scale can be achieved as
locality restrictions are overcome. Risks
are better spread with more
participants.
•Takaful operators manage the Takaful schemes. What are the
differences between the operators?

• The major differences are in terms of:

• How income are earned by the operator – either via fees,
profit sharing or combination.
• How the operator structures the distribution channel – either
via employment or agents.
• How the operator remunerates its Takaful intermediaries.
• Efficiency factors in managing the schemes i.e. the
administrative costs.
Introduction to Takaful

• Overview of Takaful
• The Principles of Takaful
• Applicable Contracts in Takaful
• Takaful Models in Malaysia
Overview of Takaful
• Definition of Takaful

•Derived from the word of Kafala = joint guarantee,

mutual help, caring and responsible

• A group of participant who mutually agreed among

them to contribute into a fund to be used as a financial
aid should any of them suffer a catastrophe or disaster
The
Mutual Responsibility
Principles of •
• Mutual Help and Co-operation

Takaful • Mutual Protection

Mutual Responsibility

• “Each one of you has a responsibility and each one of you is

responsible towards those under your responsibility.” (Bukhari &
Muslim)

• “If any one does not have compassion toward others then he does
not get any compassion from Allah.” (Bukhari & Muslim)
Mutual help/Solidarity
(Ukhuwah)
• ََِّّ ‫ان َواتَّقُوا‬
ِّ‫ّللا ِإ َّن‬ ِِّ ‫اْلثْ ِِّم َو ْالعُ ْد َو‬ َِّ ‫َوت َ َع َاونُوا َعلَى ْال ِب ِِّر َوالت َّ ْق َوى َو‬
ِ ْ ‫ل ت َ َع َاونُوا َعلَى‬
ِِّ ‫شدِي ُِّد ْال ِعقَا‬
‫ب‬ َ ‫ّللا‬
ََِّّ ( ‫المائدة‬:2)

• Meaning: Help ye one another in righteousness and

piety, but help ye not one another in sin and rancor: fear
Allah: for Allah is strict in punishment.
•
Mutual Protection
➢ “(He) Who has fed them against hunger, and has made them safe from
fear”

➢ “Verily a believer is one who can give security and protection to the life
and property of mankind (Ibn Majah)

➢ “By Allah in Whose power I am under, one will not enter paradise
unless he provides protection to a neighbor in difficulty” (Ahmad)

➢ “A person will not be counted as righteous if he sleeps comfortably on

a full stomach while his neighbor suffers from hunger” (Al-Bazzar)
Indemnity

• Insured will not get > actual loss

• Insured will be put back to his previous financial position just

before the loss.

• Eliminate gambling because payment for losses will not exceed

the value of the property destroyed regardless of the amount of
insurance that may have been purchased.

• TOTAL & PARTIAL LOSS.

Utmost Good Faith

➢ Each party (usually the applicant/insured) to correctly inform the

other party what it knows or what it ought to know whether the
other party (usually the insurer) required it or not.

➢ Insured should not misrepresent or conceal a material fact,

otherwise his/her claim will be rejected in the event of a loss.
Insurable Interest

➢ Insurable interest means that an insured will undergo a personal

financial loss when a loss caused by an insured peril occurs. If
the insured will not experience a financial loss, then the insured
cannot insure the object. Like indemnity, the purpose of
insurable interest is to prevent insurance from becoming a
gambling contract.
Subrogation

• The principle of subrogation is a result of the principle of

indemnity. Under the principle of subrogation, the insurer who
has indemnified the insured’s loss is entitled to recover the loss
from any liable third parties who are responsible to the extent
of its liability. Subrogation only applies to general insurance and
not life insurance.
Contribution

• This principle comes into play if and when there are two or more
insurance coverage on one risk. It is actually a corollary to the
principle of indemnity whereby the insured should not get more
than what is lost. When the total amount of claim form two or
more insurers exceeds the amount of loss, the insurers will pay
proportionate to their liability.
Proximate Cause

• Proximate cause can be defined as the efficient cause that brings

about a loss with no other intervening cause that breaks the
chain of events. A claim is not payable by the insurer if the
proximate cause is other than the named peril.
Applicable Contracts in Takaful
Tabarru’

▪ The contracts underlying takaful : among participants/policy

holders - Tabarru’

▪ Tabarru' is an Arabic noun which means "donation; gift;

contribution".

▪ The contract is the fundamental difference between insurance

that is Shariah compliant insurance (takaful) and conventional
insurance.
• Tabarru’
• Purpose: To establish a fund to be utilized as a financial aid for
participants should any of them suffer a catastrophe or disaster or
musibah.
• Tabarru’ is a unilateral contract that is based on sincerity .

• Application of Tabarru’ Contract

• Every takaful participant shall agree to relinquish as Tabarru’ a certain
proportion of his Takaful contribution that he agrees or undertakes to pay
thus enabling him to fulfil his obligation of mutual help and joint
guarantee should any of his fellow participants suffer a defined loss.
•
Wakalah

• Delegation of one’s affair to another

• Hanafi : the delegation of one person (the principal) for another (the
agent) to take his place in a known and permissible dealing
• Essential Elements:
• Principal (Participant)
• Agent (TISB)
• Object of the agency contract (Takaful business)
• The contract language (Takaful contract)
Mudharabah

– Under the principle of Mudharabah, the Company acting as

Al-Mudharib or the entrepreneur will accept payment of the
takaful installments or contributions from the Participants for
the Company to manage the respective takaful business
including their investment activities.
Takaful • Business model of Takaful in Malaysia:
Models in • Wakalah model (Agency)
Malaysia • Mudharabah model
 Mudharabah

• Under the principle of Mudharabah, the

Company acting as Al-Mudharib or the
entrepreneur will accept payment of
the takaful installments or
contributions from the Participants for
the Company to manage the respective
takaful business including their
investment activities.
 Mudharabah

PROFIT
100%
TO COMPANY

(100-x)%

CONTRIBUTION
CONTRIBUTION + COSTS SURPLUS
PROFIT

x%

TO PARTICIPANT
 Wakalah

• Under the principle of

Wakalah, the Company acts
as the agent of the
Participants.
 Wakalah

PROFIT
100%

CONTRIBUTION
CONTRIBUTION + COSTS SURPLUS
PROFIT

100%

TO PARTICIPANT
Introduction to Insurance
• Overview of Insurance
• Basics of Insurance
• Type of Insurance
Overview of Insurance

Insurance is defined as
• an economic institution based on the principle of mutuality
• formed for the purpose of establishing a common fund
• the need for which arises from chance occurrences of nature
• whose probability can be fairly estimated

Insurance , as an organization seeks to provide protection

against financial loss caused by fortuitous events
 • It is an economic institution
• It is based on the principle of mutuality or
cooperation
ESSENTIAL • Its objective is to accumulate funds to pay
for claims as a result of the operation of
FEATURES OF specific risks
INSURANCE • Only certain risks can be insured against,
viz. those whose occurrence can be
confidently estimated with a certain degree
of certainty
THE LAW OF LARGE NUMBERS
• Insurance, as a device of spreading losses of a few among many can only work
when insurers are able to underwrite a large number of similar risks, i.e.. based
on the law of large numbers
• The Law of Large Numbers states – as the number of loss exposures increases,
the predicted loss tends to approach the actual loss
• It can only operate efficiently only if the following requirements are fulfilled
• large number of similar loss exposures
• loss exposures must be independent, and
• random or chance occurrence of losses
 HOW DOES INSURANCE WORK ?

• The insurance company (insurer) acts as an intermediary

• That it collects the payment (premium) from those wishing
• To participate and disburse payments (claims) to those (insured)
who have suffered a loss

PREMIUM

CLAIM

Premium paid commensurate with the risk transferred

1. DEFINITION 2. LEVEL OF
OF RISK RISK

3. FORMS OF
RISK

CONCEPT
OF RISK 4. DEFINITION
OF PERIL
& HAZARD

6. INSURABLE 5. RISK
RISKS MANAGEMENT
Basics of Insurance
Primary
Function
• To spread the financial losses
• To ensure that there is an equitable
distribution of losses
Secondary
Functions
• Cost Stabilization
• Stimulates Business Enterprise
• Removes Fear and Worries
• Reduction of Losses
• Means of Savings
• Sources of Capital for Investment
• Provides Employment for many
Principle of Risk Transfer

• Transferring or shifting from a financially weaker party to one

who is financially stronger

• Sharing of losses among members in the pool on some

equitable basis
Principle of Payment of Fortuitous

• A fortuitous loss is one that is unforeseen & unexpected and

occurs as a matter of chance
Principle of Pooling Losses

• Pooling in insurance is the spreading of losses incurred by the few

over the whole group, so that in the process, average loss is
swapped for actual loss

• Law of Large Numbers – the greater the no. of exposures, the

more closely will the actual results approach the probable results
that are expected from an infinite no. of exposures (homogeneous)
Principle of Indemnity

• Indemnification henceforth is the restoration of an insured

person to his or her approximate financial position prior to the
occurrence of the loss
3 Auxiliary Principles of Insurance

• Insurable Interest – an individual with insurable interest on

the subject of insurance must stand to lose financially or suffer
harm in some ways if the subject of insurance is damaged or
destroyed or lost.

• Subrogation – process whereby the insurer is substituted for

the insured for purpose of claiming indemnity from third person
for a loss covered by insurance.

• Double insurance – is a clause that provides for the sharing

in loss on some formulas when the risk event occurs.
• Pooling of Risks is the fundamental principle
underlying insurance business and it is useful to
classify insurance business broadly into

• Life Insurance
• General Insurance
Type of Insurance
LIFE INSURANCE

Life Insurance contracts can be arranged to provide cover

against the following forms of risk

• Premature death
• Continuous stream of income during
• Retirement (i.e.. old age)
• Sickness or Disability
Life Insurance is defined as

• “A contract which secures the payment of an agreed sum of money on the

happening of a contingency, or of a variety of contingencies, dependent
on human life”

Fisher & Young Actuarial Practice of Life Assurance, Cambridge

University Press, 1971

Hence, the purpose of Life insurance is to provide funds in the event of

early death, disability or prolonged old age of the life assured
• Life Insurance contracts have the following characteristics:

• they are Aleatory contracts, i.e.

•
• where one party provides something of value (premiums) to
another party in exchange for a promise that the other party will
perform a stated act (claim payment) if a specified, uncertain
event occurs (death, whether natural, or due to disease or
accident)
• they are long term contracts, and usually with level premiums i.e.
where the level premium computed would include factors like
• - mortality
• - management expenses
• - rate of investment returns
• - tax liability

•
• Life Insurance contracts have the following characteristics (Cont.):

• they cannot be cancelled unilaterally by the insurer during their currency

• these contracts would ceased or terminate on the payment of a claim
• the six legal principles of insurance are applicable to these contracts
• - insurable interest (need only to exist at inception)
• - utmost good faith
• - proximate cause
• - indemnity
• - contribution
• - subrogation
The risks covered by Life insurance policies
can be grouped under:
• Premature death - premature death of the breadwinner would result in financial loss to the family

• Permanent disability - to avert an ‘economic death’ as the life assured ceased to be a productive source with
living expenses and medical attention burden to bear

• Temporary disability - financial disruption to the insured and his family

• Retirement benefits - to ensure that the retiring individual be financially self-sufficient and be able to
support himself and his wife during the remaining years of their lives

• Financial guarantee - where some life policies incorporates a savings element, e.g. an endowment life policy
with a guaranteed payout
The main forms of Life Insurance
business are classified under the
following headings:
• Term Insurance policies
• Whole Life policies
• Endowment policies
• Annuities
• Permanent Health insurance policies
• Dreaded Disease cover
• Investment linked policies
• Miscellaneous policies
• GENERAL INSURANCE
• General Insurance business can be taken to be
all other form of insurance business (including
the reinsurance of liabilities under a policy in
respect thereof) which is not life insurance
business as defined in the Insurance Act 1996
• Some of the risks covered by General Insurance
are
• Lost or damage to property e.g. to motor
vehicles, ship, building, stock-in-trade etc.
• Legal Liability caused by products or goods
sold or the process carried out
• Death or injury to a person by accident
Key Differences between Insurance
and Takaful
• Shariah Resolution on Insurance
• Prohibited Elements for Takaful
• Contractual Differences
Shariah Resolution on Insurance
Imam Sayyid Muhammad Amin ibn Sayyid Umar (Ibn Abidin)
Ibn Abidin, Islamic scholar of Hanafi School of Taught issued a Fatwa in 1836 that the
Contract of Exchange applied in conventional insurance does not comply with the contract
of exchange (Muawadhah) as required by the Shariah.

The National Fatwa Committee

Fatwa Committee of the National Council for Islamic Religious Affairs Malaysia, at its
meeting on 15 June 1972 discussed and deliberated on the issue of Life Insurance.
Resolved: That Life Insurance provided by present-day insurance companies is a business
transaction which is voidable because it contradicts the Islamic business principles in view
that the contract contains the elements of Gharar, Maysir and Riba. As such from the
Shariah point of view, insurance is haram”.
The Islamic Fiqh Academy of OIC
The Islamic Fiqh Academy, emanating from the Organization of Islamic Conference, meeting in its Second Session in Jeddah, Kingdom
of Saudi Arabia, from 10 to 16 Rabiulawal, 1406 H (corresponding to 22 - 28 December 1985). And after reviewing the presentations
made by the participating scholars during the Session on the subject of `Insurance and re-insurance’, and after discussing the same,
and after closely examining all types and forms of insurance and deeply examining the basic principles upon which they are founded
and their goal and objectives, and having looked into what has been issued by the Fiqh Academies and other edifying institutions in
this regard;
Resolved:
• The Commercial Insurance Contract, with a fixed periodical premium, which is commonly used by commercial insurance
companies, is a contract which contains major element of risks, which voids the contract and therefore, is prohibited (haram)
according to the Shariah.
• The alternative contract which conforms to the principles of Islamic dealings is the contract of co-operative insurance, which is
founded on the basis of charity and co-operation.
• The Academy invites the Muslims countries to work on establishing co-operative insurance institutions and co-operative entities
for the re-insurance, in order to liberate the Islamic economy from the exploitation and violation of the system which Allah has
chosen for this Ummah.
Prohibited Elements for Takaful
• The concept of insurance has not achieved full agreement from scholars
whether it is permissible (halal) or prohibited (haram). Since insurance as it
is being practiced now did not exist during the Prophet’s time, ‘Ijtihad’ is
used to determine whether it is permissible or otherwise.

• Insurance is based on buy and sell contract which has created the following
prohibited elements for Takaful:
Riba
Riba Nasi’ah The exchange of ribawi item between insured
(premium) and insurance company (claim
benefits) at different time.
Riba Fadhl The exchange of ribawi item between insured
(premium) and insurance company (claim benefits) at
different quantity.

Riba Qard • Insurance company invests the premium in interest

bearing investment.
• Insurance company pays interest on their product.
• Insurance company considers future interest when
calculating the premium.
• Interest charged on policy loan

Riba Jahiliyyah Interest charged on late payment of premium.

Riba in Insurance

• Policyholder is promised an amount far in excess of what he has

paid as premium.

• Insurance company imposes interest on policyholder in the event

of lapse or default

• Deferment in exchange of money (premium) with money

(compensation – monetary term) - Riba Nasi’ah
Riba in Contract
Policyholder is promised an amount far in excess
of what he has paid as premium.
Riba in Operation
Insurance company imposes interest on
policyholder in the event of lapse or default
Deferment in exchange of money (premium)
with money (compensation – monetary term) -
Riba Nasi’ah
Gharar
• Both parties to the insurance contract do not know exactly what their obligations and
responsibilities are to each other, neither the insurer nor the insured knows the outcome of
the contract.
• The insured does not know the amount of compensation he is likely to get in case of an
accident or a peril as the insured does not know if there will be compensation as the
outcome of the contract is not known.
• The insurer does not know when the peril will occur.
• There is no equity in insurance in that the insured has got to pay the premium but if the peril
insured against does not happen, the insured is not paid anything at all.
• Insurance is a promise to pay compensation which is sometimes fulfilled and sometimes not.
Uncertainty in the results of the exchange as at the point the contract is made, the result of
the exchange is still uncertain.
Gharar in Insurance

➢ Gharar: Uncertainty, arises because the application of buy and

sell contract does not comply with requirements of buy and sell
contract as prescribed in Islamic Muamalat System.

➢ Essential elements of buy and sell contract :

▪ Contracting parties
▪ Asset
▪ Price
▪ Contract (Ijab & Qabul)
Gharar in Insurance : Asset/Subject Matter

▪ Asset/subject matter in insurance contract is ‘guaranty of protection’

(monetary term) or compensation which does not comply with
necessary conditions of asset in buy and sell contract, because :

▪ The asset does not exist

▪ The asset cannot be delivered
▪ The nature of asset, form, quantity, amount, timing of delivery
cannot be determined.

▪ Uncertainty as to whether or not the insured will get the

compensation.
▪ Uncertainty as to when the compensation can be paid and how
much
Maysir

• Insured could receive huge amount of money, without

equivalent input.
• Possibility of paying premium without getting any amount in
return.
• Insurer loses if there are too many claimants.
• Premium collected exceeds the claims, Insurers could make
huge profits.
Maisir in Insurance

• Maisir is gambling. Its occurs in Insurance contract as follows :

– Insured could receive huge amount of money, without

equivalent input
– Paying premium without getting any amount in return
– Insurer loses if there are too many claimants
– Premium collected exceeds the claims, Insurers could make
huge profits.

• In Islam, any payment made based on possibilities is

considered as gambling.
 Contractual Differences

Contract

INSURANCE TAKAFUL
Ownership is given Ownership is given
through Muawadhah through
(buy & sell) contract Tabarru’ (donation)
contract
 Objective : To provide protections

Very noble and very Islamic

BUT

OPERATION

Problems

Gharar Riba Maisir

This Photo by Unknown Author is licensed under CC BY-NC-ND