Cooperative and Commercial Insurance

Cooperative and Commercial Insurance 

Question:

1. Ruling on working as a middleman between people and insurance companies to make money from that and reduce premiums paid by policyholders. I have been told that car insurance is Haram but because it’s a legal requirement here in the UK; it becomes permissible. At the moment car insurance companies seem to be charging very expensive prices towards young people such as myself because they feel young drivers are more dangerous and more likely to get into a car accident. To solve the problem I came up with a business idea where I am a middleman (a broker) between insurance companies and young drivers, i have come up with a system where young drivers first pay the same high price that everyone is charging them but if they get into no accident they get some of their money back. This way I will attract more customers for insurance companies and because of the money the customers are getting back, they are more likely to drive a bit more sensibly. And I will be taking a small commission from both sides for my services. My question is; is my business haram because insurance and anything to do with insurance is haram in Islam, or is it allowed because I am only a middleman/broker not the actual insurance company all I a m doing is introducing the two parties to each other and in the UK car insurance is a necessary requirement by Law in order to drive a car (and in my way there is more good because at least people pay less

2. The true nature of insurance and the rulings concerning it. What are the rulings on commercial insurance which is widespread nowadays?

3. Evidence for the prohibition on commercial insurance. What is the evidence for commercial insurance being haraam?.

4. The difference between cooperative insurance and commercial insurance. I am an employee in a government-run company. My question is whether the health insurance offered by my company is permissible. It can be summed up in the following two points: 

a. It is a financial fund that is called “the health insurance fund”. It is supervised by a committee that pays compensation to employees after they submit the medical prescription showing the amount paid by the employee to the doctor. 

b. The income for the fund comes from two sources: (i) the company’s contribution to the fund, which represents approximately 80% of the fund’s income and is taken from the annual profits of the company; (ii) contributions in the form of deductions from employees’ salaries, which represents approximately 20% of the fund’s income. The amount of 1000 dinars (approximately equivalent to 3 riyals) is deducted from the salary of an unmarried worker, and 3000 dinars is deducted from the salary of a married worker, after submitting an application to the supervising committee of the fund to include his family in his health insurance. 

c. Joining the health insurance program is voluntary for both unmarried and married employees. 

d. Compensation paid to the employee may be greater than the value of the monthly subscription fee; the payout to employees during one month may vary from one person to another, depending on whether he sees a doctor, because not all people fall sick in the same month. Hence some may benefit from compensation whilst others do not. 

e. In the event that an employee does not benefit from this compensation, the amount deducted from his salary is not refundable, either at the end of the year or at retirement. 

f. Any surplus at the end of the year is carried forward to the following year and remains in the fund, and the new annual income is added to it. 

g. The company does not deal with any insurance company.
Is this health insurance regarded as cooperative insurance and is it permissible to subscribe to it?

Answer:

1.      Praise be to Allaah. 

Firstly:

Commercial insurance is haraam in all forms, because it is based on ambiguity and gambling, as well as riba (usury). Hence it is the exchange of money for money, with the possibility of increase or decrease. It says in Fataawa al-Lajnah ad-Daa’imah (15/246): Commercial insurance is haraam, for the following reasons:

1. The commercial insurance policy comes under the heading of financial transactions based on probability and involving extreme ambiguity, because the policyholder cannot know at the time of entering into the contract (policy) how much he will give or take. He may make one or two payments, then a disaster may occur because of which he becomes entitled to take what the insurance company committed to give, or no disaster may ever happen, in which case he will end up making all the payments and taking nothing. Similarly, the insurance company cannot determine how much it will give or take in any particular contract or policy. It is narrated in a saheeh hadith from the Prophet (blessings and peace of Allah be upon him) that transactions based on ambiguity are prohibited. 

  2. Commercial insurance contracts (insurance policies) are a type of gambling, because there is too much risk involved in this kind of financial transaction; there is the risk of loss being incurred by one party without being at fault or causing the wrong action, and there is the possibility of making gains for nothing in return, or for a little in return that is not equal to the gain. The policyholder may make one payment, then an accident may occur because of which the insurance company is required to pay out the entire sum (as stated in the policy), or there may be no accident or disaster, yet the insurance company will gain by receiving installments for nothing in return. When ambiguity becomes so great, the transaction becomes like gambling and comes under the general prohibition on gambling that is mentioned in the verse in which Allah, may He be exalted, says (interpretation of the meaning):“O you who have believed, indeed, intoxicants, gambling, [sacrificing on] stone alters [to other than Allah], and divining arrows are but defilement from the work of Satan, so avoid it that you may be successful. Satan only wants to cause between you animosity and hatred through intoxicants and gambling and to avert you from the remembrance of Allah and from prayer. So will you not desist?” [QS al-Maa’idah 5:90-91]. 3.

 (3)  Insurance contracts or policies involve riba al-fadl [when similar commodities are exchanged unequally, such as one measure of dates for two measures of a different quality of dates] and riba an-nasaa’ [when the amount of debt is increased when the debtor is unable to pay off the debt at the appointed time and requests extra time in which to pay it off]. If the insurance company pays the policyholder or his heirs, or some other beneficiary, more than the total amount that was paid to it, then this is riba al-fadl; if the insurance company pays that money to the policyholder sometime after the beginning of the contract or policy, then it is also riba nasi'ah. If the company pays the policyholder the same amount as he paid to them, then that is riba nasi'ah only. Both types of riba are haraam according to both the religious texts and scholarly consensus. (Permanent Committee for Scholarly Research and Iftaa’.‘Abdullah ibn Qa‘ood, ‘Abd ar-Razzaaq ‘Afeefi, ‘Abd al-‘Azeez ibn ‘Abdillah ibn Baaz. End quote. )

 But if someone is compelled to take out insurance, as in the case of auto insurance, then there is no sin on him, but it cannot be said that insurance has become permissible, because it is an unlawful (haraam) contract, and the sin involved is borne by those who make it compulsory.

Hence it is not permissible for you to work as a middleman in order to make a profit from this insurance, even if that will help to reduce premiums for young people because it is not permissible to make a profit by promoting an unlawful contract, especially if it involves riba. Muslim (1598) narrated that Jaabir said: The Messenger of Allah (peace and blessings of Allah be upon him) cursed the one who consumes riba and the one who pays it, the one who writes it down and the two who witness it, and he said: they are all the same.

 This is indicative of the gravity of the sin involved in helping with riba in anyway. And Allah knows best.

 2. Praise be to Allaah.

(1) All kinds of commercial insurance are clearly and undoubtedly ribaa (interest/usury). Insurance is the sale of money for money, of a greater or lesser amount, with a delay in one of the payments. It involves riba al-fadl (interest-based transaction) and riba al-nas’ (interest to be charged if payment is delayed beyond the due date), because the insurance companies take people’s money and promise to pay them more or less money when a specific accident against which insurance has been taken out happens. This is riba, and riba is forbidden in the Qur’aan, in many aayaat.

 (2)All kinds of commercial insurance are based on nothing but gambling which is haraam according to the Qur’aan:

“O you who believe! Intoxicants (all kinds of alcoholic drinks), and gambling, and Al-Ansaab (stone altars for sacrifice to idols etc.) and Al-Azlaam (arrows for seeking luck or decision) are an abomination of Shaytaan’s (Satan’s) handiwork. So avoid (strictly all) that (abomination) in order that you may be successful” (QS al-Maa’idah 5:90 – interpretation o the meaning )

All kinds of insurance are kinds of playing with chances. They tell you, Pay this much money, then if this happens to you we will give you this much. This is pure gambling. Insisting on differentiating between insurance and gambling is pure stubbornness that is unacceptable to any sound mind. The insurance companies themselves admit that insurance is gambling.

(3)All kinds of insurance are forms of uncertainty, and transactions which involve uncertainty are forbidden according to many saheeh ahaadeeth, such as the hadeeth narrated by Abu Hurayrah (may Allaah be pleased with him):

“The Messenger of Allaah (peace and blessings of Allaah be upon him) forbade transactions determined by throwing a stone and transactions which involved some uncertainty.” (Narrated by Muslim).

[“Transactions determined by throwing a stone” – this was a type of transaction that was prevalent in the markets of pre-Islamic Arabia, whereby a stone was thrown by either the buyer or the seller, and whatever it touched, its transaction became binding. “Transactions which involved some uncertainty” – is a transaction in which there is no guarantee that the seller can deliver the goods for which he receives payment. Footnotes from the translation of Saheeh Muslim. (Translator)].

All forms of commercial insurance are based on the uncertainty of the most extreme kind. Insurance companies and those who sell insurance refuse to ensure cases except where there is clear uncertainty in whether or not the condition being insured against will happen or not. In other words, the condition being insured against must have a possibility of happening or not happening (as opposed to, for example, someone who has a pre-existing condition, such as a person who is on death row applying for life insurance--translator.) Moreover, this transaction involves something uncertain, which is when an accident will happen and the extent of the damage caused. Hence insurance combines three kinds of extreme uncertainty.

(4) All kinds of commercial insurance consume people’s wealth unjustly, which is haraam according to the Qur’aan:

“O you who believe! Eat not up your property among yourselves unjustly” (QS al-Nisaa’ 4:29 – interpretation of the meaning).

All forms of commercial insurance are fraudulent transactions aimed at consuming people’s wealth unjustly. The precise statistics calculated by one of the German experts state that what people get back of what has been taken from them is no more than 2.9%.

Insurance is an immense loss for the nation, and there is no evidence or excuse to be found in the actions of the kuffaar who have lost the ties of kinship and friendship and are therefore forced to resort to insurance, which they hate as much as they hate death.

These are only some of the violations of shari'a which insurance is essentially based upon. There are numerous other violations which we do not have room to mention here, and there is no need to do so, because just one of the violations which we have mentioned above is sufficient to make insurance one of the things which is most prohibited in the shari'a of Allaah. 

It is a shame that some people are deceived by the ways in which the insurance companies make insurance attractive and confuse them by calling it “co-operative” or “mutual support” or “Islamic”, or other names which do not change the unjust nature of insurance in the slightest. 

The insurance companies’ claim that the ‘ulamaa’ have issued fatwas stating that so-called “co-operative insurance” is halaal, is a lie. The reason for this confusion is that some insurance companies approached the ‘ulamaa’ with a deceitful set-up which has nothing to do with any kind of insurance, but they said that it was a kind of insurance which they called “co-operative insurance” (to make it sound attractive and to confuse the people). They said that it was purely in the nature of a donation and that it was a kind of the co-operation enjoined by Allaah in the aayah (interpretation of the meaning): “Help you one another in Al-Birr and At-Taqwa (virtue, righteousness and piety)…” (QS al-Maa’idah 5:2), and that the aim was to co-operate in alleviating the overwhelming disasters that may befall people. But in fact what they called co-operative insurance was just like any other kind of insurance; the only difference was in the way in which it was set up, not in its essential nature. It was far from being any kind of simple donation or co-operation in righteousness and piety; in fact, it is a kind of co-operation in sin and transgression. It was not aimed at helping to relieve the distress of calamities, but at depriving people of their wealth by unjust means, which is absolutely haraam, as are other kinds of insurance. Hence what they proposed to the ‘ulamaa’ is not even insurance at all.

With regard to the claim made by some, that part of the premium (money paid to the insurer) is returned, this does not change anything and does not free insurance from the taint of ribaa, gambling, transactions based on uncertainty, unjust consumption of people’s wealth and going against the principle of trusting in Allaah (tawakkul), and other kinds of haraam actions. Insurance is deceit and confusion. Anyone who wishes to learn more should refer to the essay al-Ta’meen wa Ahkaamuhu (Insurance and its rulings). I call on every Muslim who has pride in his religion and whose hopes are focused on Allaah and the Last Day to fear Allaah and to avoid all kinds of insurance, no matter how attractive their proponents make them, for they are undoubtedly forbidden. In this manner, he will protect his religion and his wealth, and he will be blessed with security from the Owner of security, may He be exalted.

May Allaah help me and you to have insight into matters of religion and to do that which is pleasing to the Lord of the Worlds. (See: Khalaasah Fi Hukm Al-Ta’meen By Shaykh Dr. Sulaymaan Ibn Ibraaheem Al-Thaniyaan Member Of Faculty, Sharee’ah College, Al-Qaseem)

 3. Praise be to Allaah.

Commercial insurance which is offered by most insurance companies is a kind of haraam contract, whether it is insurance covering one's life or possessions or anything else. The fact that it is haraam is indicated by a number of texts and shar’i principles, such as: 

1. Insurance is a transaction that involves ambiguity, and transactions that involve ambiguity are forbidden according to shari'a. Muslim (1513) narrated from Abu Hurayrah (may Allaah be pleased with him) that the Prophet (peace and blessings of Allaah be upon him) forbade gharar (ambiguous) transactions.  Gharar in Arabic means a risk which is not certain; it may happen or not, such as selling fish in the water or birds in the air, because the purchaser may or may not get it.  Al-Azhari said: Gharar transactions include any transactions in which something is not known.  Mu’jam Maqaayees al-Lughah (4/380-381); Lisaan al-‘Arab (6/317).  

Al-Khattaabi (may Allah have mercy on him) said: The root meaning of the word gharar (ambiguity) is that which is wrapped up and concealed from you. Any transaction which is based on ambiguity or on the inability to achieve something is gharar. There are many kinds of ambiguity, which all involve not knowing exactly what the transaction involves.  End quote. 

Al-Nawawi (may Allah have mercy on him) said: “With regard to the prohibition on ambiguous transactions, this is a very important principle with regard to commercial transactions, and includes many issues, such as selling things that are not present or are unknown, and so on. All of these are invalid transactions because there is ambiguity with no reason for that.” 

Some kinds of ambiguity may be tolerated when engaging in a transaction if there was a reason for it, such as not knowing about the foundations of the house; this transaction is still valid because the foundations belong to what can be seen of the house, and because there is a reason for this, as it is not possible to see the foundations. They are unanimously agreed that it is invalid to sell foetuses that are in utero and birds in the air. The scholars said: The reason for it being invalid is because of ambiguity. End quote. 

The scholars are agreed that a great deal of ambiguity is not permissible, but a little of it may be overlooked. They differed as to what constitutes a little or a great deal. Bidaayah al-Mujtahid, 2/187; al-Nawawi said something similar in Sharh Muslim. 

Insurance policies are among the contracts that involve a great deal of ambiguity; even lawmakers themselves have affirmed that insurance contracts are based on probabilities, which means ambiguous because neither the insurer nor the insured can know at the time of entering into the contract what he will give or take. The person who takes out insurance may pay one installment, then an accident may happen and the insurer is obliged to give what he agreed to give to him, or perhaps nothing will happen at all, so he will pay all the installments and not take anything. 

2. Insurance contracts are a kind of gambling. Gambling is haraam, as it was forbidden by Allah, when He said (interpretation of the meaning): “Intoxicants (all kinds of alcoholic drinks), and gambling, and Al‑Ansaab (stone altars for sacrifices to idols etc), and Al‑Azlaam (arrows for seeking luck or decision) are an abomination of Shaytaan’s (Satan’s) handiwork. So avoid (strictly all) that (abomination) in order that you may be successful”[QS al-Maa’idah 5:90]

What is meant by gambling is when a person pays something of his own money and takes a risk: either he will gain more than it or he will lose the money that he paid. 

Insurance is a transaction that is connected to a risk that may or may not happen, so it is, in effect, gambling, because the person who takes out insurance is taking the risk by paying the premium. Either he will take more than it or he will lose it if the risk against which he is insured does not happen. The person who is insured may pay twenty and take one thousand, or he may pay one thousand and take one thousand, or he may pay one thousand and not take anything if the risk against which he was insured does not happen. 

Is this not taking risks and gambling? 

3. Insurance involves riba al-nasee’ah and riba al-fadl, in the event that compensation is paid

Muslim (1587) narrated that ‘Ubaadah ibn al-Saamit (may Allah be pleased with him) said: The Messenger of Allaah (blessings and peace of Allah be upon him) said: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, like for like, same for same, hand to hand. But if these commodities differ, then sell as you like, as long as it is hand to hand.” 

This hadeeth indicates that if a person sells gold for gold, it must be equal amounts and the exchange completed in the same sitting. 

So it should be sold a gram for gram, with nothing added, and the exchange must be completed in the same sitting. It is not permissible for the two parties to separate without each of them have taken what is due to him. 

If a person sells gold for gold with a difference in the amount, then they have fallen into riba al-fadl. If the exchange is not completed then they have fallen into riba al-nasee’ah, i.e., interest charged when a hand-to-hand exchange is delayed. 

If gold is sold for silver then the exchange must be completed in the same sitting, and it is permissible for there to be a difference in the amounts. So a gram of gold may be sold for 10 g of silver, for example, but it is not permissible for them to separate without the exchange having been completed. 

Currency comes under the same ruling as gold and silver in this regard. It is not permissible to exchange one currency for another unless the exchange is completed in the same sitting. If the currency is all the same, then it must be like for like and the exchange should be completed, just as if gold were being exchanged for gold. 

Insurance includes riba of both types: riba al-fadl and riba al-nasee’ah. 

What that means is that what the insurance gives to the person who takes out insurance, or to his heirs, if the risk defined in the contract happens, will be one of three things: either it will be less than what he paid or more than that or equal to it. 

In all these cases what the company gives to the insured person happens after he pays the insurance installments during a period of which the end is in fact unknown. 

So the reality of the transaction is that it is paying money for money to be given at a later date. 

If the amounts are equal, then this is riba al-nasee’ah; if more [or less] is paid, then it is riba al-fadl and al-nasee’ah, both of which are haraam on their own so how about if they are combined? 

4. Insurance is consuming people's wealth unlawfully. Consuming people's wealth unlawfully is haraam. 

Allah says (interpretation of the meaning): “O you who believe! Eat not up your property among yourselves unjustly except it be a trade amongst you, by mutual consent” [QS al-Nisa’ 4:29]. 

What is invalid in every way which is not permitted by sharee’ah, and which involves stealing, betrayal, robbery, gambling, riba-based contracts, and corrupt transactions. This was stated by Abu Hayyaan in his commentary on this verse. 

What is meant by insurance involving consuming people's wealth unlawfully is if the money paid by the insurance to the person who is insured is more than he paid -- such as if the risk occurs after paying just one installment -- then on what basis is he entitled to this money? And if the risk does not occur, then on what basis is the insurance company entitled to the payments made by the person who was insured without anything in return? 

Statistics by a German expert have proven that the ratio of payments made by insurance companies in compensation to individuals is equivalent to no more than 2.9% of the total amount of payments made. On what basis is the insurance company entitled this money, and in return for what? 

5. Insurance contracts make obligatory things that are not obligatory according to sharee’ah

Insurance contracts oblige the insurance company to pay compensation, if the risk against which insurance was taken happens. On what basis is this made binding? The insurance company did not cause the danger or make it happen; it did not commit any acts of aggression or shortcoming, so how can it be forced to pay compensation for something for which it is not liable according to sharee’ah? 

6. Insurance harms both individuals and society

In addition to what is mentioned above, insurance is not free of other harmful effects, among the most important of which are the following: 

Taking things lightly: it makes the people insured careless about protecting their property against calamity; they may even go further than that and cause accidents or make accidents worse. This causes a great deal of harm to individuals. For example, some drivers whose lives and cars are insured may become careless and not pay heed to traffic laws and regulations, which exposes individuals to harm caused by accidents and car crashes. 

Each one of these reasons is sufficient to indicate that commercial insurance is haraam and that insurance contracts are invalid contracts which are not permitted by shari'a, and that it comes under the heading of consuming people's wealth unlawfully. So how about when all these reasons are combined? 

Hence the majority of contemporary scholars have ruled that all forms of commercial insurance are haraam. Statements have been issued by the Council of Senior Scholars in the Land of the Two Holy Sanctuaries and by the Islamic Fiqh Councils in Jeddah and Makkah, that commercial insurance is haraam according to consensus, and not one member of the Council disagreed. We have quoted a great deal of these statements and fatwas in the answers to various questions on our site. See a lengthy discussion of commercial insurance in Abhaath Hay’at Kibaar al-‘Ulama’, 4/33-315. And Allah knows best.

4. Praise be to Allah.

Firstly: 

The most important difference between the two types of insurance (cooperative versus commercial) is that the money deducted for cooperative insurance is not owned by the committee that is administering the fund; rather it remains a donation that is to be spent on whoever meets the conditions. In contrast, the administrators of commercial health insurance funds have ownership of the subscriptions and deductibles paid by the subscribers, and that is included in their personal accounts, in return for the administration committee being committed to treat anyone who meets the conditions. There is a big difference between the two types. 

The first type is cooperative and offers mutual support, and there is a hadeeth that supports it in principle. It was narrated that Abu Moosa (may Allah be pleased with him) said: The Prophet (blessings and peace of Allah be upon him) said: “If the Ash‘aris run short of provisions during a campaign or they run short of food for their families in Madinah, they gather whatever they have in a single cloth and share it out equally amongst themselves. They belong to me and I belong to them.” Narrated by al-Bukhari, 2486; he included it in a chapter entitled: “Chapter on sharing food and other resources, and how to divide that which may be weighed or measured handful by handful (without weighing it or measuring it), because the Muslims did not see anything wrong with sharing out provisions when traveling so that one could come and have some, and another could come and have some…” 

As for the second type (commercial insurance), it is a kind of gambling; all contemporary fiqh councils are agreed that it is haraam. 

Secondly: 

There are other essential differences between cooperative health insurance to which it is permissible to subscribe, and that haraam type of insurance which is based on gambling. It is essential to investigate these differences before issuing a fatwa ruling that any specific case is halaal or haraam. 

It says in al-Ma‘aayeer ash-Shar‘iyyah (p. 372-373): 

The reason why cooperative insurance is permissible and commercial insurance is forbidden is the following essential differences: 

(a) Traditional (commercial) insurance is a contract offering something in return for financial compensation; it is aimed at making a profit from the insurance itself, therefore it is subject to the same rulings as other financial transactions, whereby it may be affected by ambiguity. The ruling on traditional insurance is that it is haraam according to sharee‘ah. As for cooperative insurance, it is a commitment to donate and is not affected by ambiguity.

(b) The company that manages Islamic insurance [or an insurance fund in some cases, such as that mentioned in this question] is acting as an agent when drawing up the insurance contract. In contrast, the company is a main party in the case of commercial insurance and draws up contracts in its own name.

(c) In the case of commercial insurance, the company has ownership of the payments made in return for the commitment to pay out money in the case of illness. In the case of the Islamic insurance company, it does not have ownership of these payments, because these payments become the property of the fund.

(d) Whatever is left of the payments and their returns – after payment of expenses and compensation – remains in the ownership of the policy holders, and this is the surplus which is to be distributed to them. But this is not possible in the case of commercial insurance, because the payments become the property of the company by virtue of the contract and receipt of the payments. In fact that money is regarded as income and profit in the case of commercial insurance.

(e) Returns on the investment of monthly subscriptions, after deducting a percentage of the profit for the company (which is investing the fund), go back to the policyholders in the case of Islamic insurance, and they go back to the company itself in the case of commercial insurance.

(f) Islamic insurance is aimed at creating cooperation between different members of society; it is not aimed at making a profit by selling the insurance. In contrast, commercial insurance is aimed at making a profit from the insurance itself.

(g) In the case of Islamic insurance, the company’s profits result from investing its money and its share of the profit in mudaarabah investments, because it is managing the funds and investments, and the fund itself is the owner of the wealth.

(h) The one who subscribes and the one who is giving the insurance is the same in the case of Islamic insurance, even though they may be different in practical terms. In the case of commercial insurance, they are two completely different entities.

(i) In the case of Islamic insurance, the company is bound by the rulings of sharee‘ah and the fatwas of its sharee‘ah committee. In the case of commercial insurance, it is not bound by the rulings of sharee‘ah. End quote.

We know that many of these differences are not relevant when speaking about the fund mentioned in the question, but we have quoted them here so that the reader may understand the real and important differences between cooperative insurance which is permissible, and commercial insurance which is forbidden, and thus will be able to weigh up and judge other types of government health insurance funds. 

Thirdly: 

In order to issue a precise fatwa concerning your fund and to try to help you to follow the shar‘ie guidelines on cooperative insurance, it is essential that you send us the official documents which regulate the work of the fund, and the contracts that subscribers have to sign, so that we can study them and determine the ruling on them. Although we think it most likely that the way your fund is operated is sound, in sha Allah, we cannot be certain of the ruling before examining the official rules and regulations governing the fund, and the application forms for joining it. 

The book al-Ma‘aayeer ash-Shar‘iyyah stipulates a number of basic matters which must be stated in the articles of association of cooperative funds, as it says (p. 364): 

Islamic insurance is an agreement among people who are exposed to a particular danger to deal with any harm resulting from this danger, by paying subscriptions in the form of a commitment to donate; from that a fund is formed that is a separate, financially independent, virtual entity, from which compensation is paid for harm that may befall one of the subscribers because of some danger against which he was insured, in accordance with the bylaws and contracts. The administration of this fund is handled by a committee chosen from among the policyholders or by a limited liability company in return for a fee paid to administer the insurance and invest the money in the fund. 

As for traditional insurance, it is a financial transaction that is aimed at making profits from the insurance itself, subject to the rulings on financial transactions that may be affected by ambiguity; the ruling on traditional insurance is that it is forbidden according to shari'a (because of the ambiguity it involves). 

Islamic insurance is based upon the following shar‘ie guidelines and principles, which must be stated clearly in the company’s articles of association: 

1. The commitment to donate, whereby the policyholder donates his monthly subscriptions and the returns on them to the fund, in order to pay compensation. He may also commit himself to pay his share towards covering any deficit, in accordance with the bylaws.

2. The company that is running the insurance fund should have two separate accounts: one which has to do with the company itself and its rights and commitments, and another which has to do with the fund and the rights and commitments of the policyholders.

3. The company is acting as an agent when administering the fund and when investing what is owned by the fund.

4. The insurance account has to do with whatever is owned by the fund and the returns on its investments, as well as other commitments.

5. The bylaws may include a clause dealing with disposal of any surplus according to what serves the interests of the policyholders, provided that the company that is administering the fund does not get any of this surplus.

6. In the event of liquidation, all the money in the fund and any surplus accumulated is to be spent on charitable causes.

7. It is preferred that the policyholders should administer the insurance fund.

8. The company is committed to abiding by all rulings and principles of Islamic shari'a in all its activities and investments, and in particular, is not to ensure anything that is haraam.

9. A Shari'a Watchdog Committee should be appointed whose fatwas will be binding upon the company. End quote.

All of these matters should be paid attention to in the bylaws that regulate the activities of the insurance fund, especially those that invest these subscriptions of the people insured for the benefit of the fund. It is essential to ensure that these principles are present in the bylaws and articles of association governing the insurance. And Allah knows best.

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(Source: https://islamqa.info/en/answers/ ) with similar topic/questions are combined. 

Questions answered by Islam Q&A Team with the general supervised by Syaikh Muhammad Saalih al-Munajjid.  Editor: Ustaz Sofyan Kaoy Umar. e-mail: ustazsofyan@gmail.com