Is it Possible to Find a Reliable Islamic Alternative to Conventional Insurance*?

All perfect praise be to Allah the Lord of the Worlds. May His peace and blessings be upon our Prophet Mohammad and upon all his family and companions.

Insurance has become one of the necessities indispensable to contemporary societies. Juristic debate on the subject of insurance has been extensive. Therefore, this article will focus on presenting a sequential review of the ruling on insurance and its Islamic alternatives.

The Permissibility of the Commercial Insurance Contract under Sharia

Commercial insurance, as an organized contract and institution, first appeared in the 14th century CE in England. A marine insurance policy was found in 1347 CE, followed by the Edicts of Barcelona in 1435 CE which codified the marine insurance contract. Alongside marine insurance, life insurance emerged for sailors and captains; a life insurance policy was found in London in 1583 CE. Fire insurance then appeared in 1666 CE following the fire that consumed the greater part of London's houses. Commercial insurance companies subsequently spread throughout the world.

Among the earliest Fatāwā (Sharia rulings) addressing the permissibility of insurance was that of the scholar Aḥmad ibn Yaḥyā al-Murtaḍā (d. 840 AH) in his book [Al-Baḥr az-Zakhkhār], where he stated: "Guaranteeing what is stolen or drowned is void." The Seal of the Verifiers, the scholar Ibn 'Ābidīn al-Ḥanafī, was the first to delve into the detailed rulings of insurance, stating in his famous commentary [Radd al-Muḥtār 'alā ad-Durr al-Mukhtār Sharḥ Tanwīr al-Abṣār]: "An important point concerning what merchants do by paying what is called Sūkarah [insurance premium] and guaranteeing against loss in the ship from the enemy." He then detailed the form of the insurance and ruled on its permissibility, saying: "What appears clear to me is that it is not permissible for the merchant to take compensation for his perished property, because this is an undertaking of what is not obligatory." Early in the 20th century, a treatise appeared by the Mufti of the Egyptian Lands, Muḥammad Bakhīt al-Muṭī'ī (d. 1906), [Aḥkām as-Sūkūrtāh], in which he explained that the insurance contract is void due to excessive uncertainty (Gharar), risk (Khaṭar), and gambling (Qimār).

The strong disagreement over the ruling on insurance did not emerge until the mid-20th century. A group of prominent contemporary jurists defended the permissibility of insurance—regardless of specific conditions that might invalidate the contract—such as Shaykh Muṣṭafā az-Zarqā and Shaykh 'Alī al-Khafīf, among others. Their perspective was based on the view that commercial insurance could be deduced from several contracts permissible according to Sharia, such as the contract of allegiance/alliance (Muwālāt), the system of 'Awāqil (shared liability for accidental homicide), the custody contract (Ḥirāsah), and guaranteeing road risk. Shaykh Az-Zarqā viewed the object of the commercial insurance contract as the security (Amān) that the insured receives from the contract.

However, the majority of contemporary jurists, such as Shaykh Muḥammad Abū Zahrah, Dr. Aṣ-Ṣiddīq aḍ-Ḍarīr, the International Islamic Fiqh Academy, and the Islamic Fiqh Council of the Muslim World League, considered commercial insurance to contain several Shariah prohibitions:

1. Excessive Uncertainty (Gharar): This exists because the amount of compensation depends on the realization of the insured risk. The insured who paid the premium does not know whether he will receive the insurance amount, and the amount of compensation he will receive upon the realization of the risk is unknown.

2. Gambling (Qimār): The outcome is that either the insured wins and the company loses if the insured risk is realized, or the company profits and the insured loses what he paid if the insured risk is not realized.

3. Usury (Ribā): The cash paid by the insured may be returned to him in a greater or lesser amount when the insured risk occurs. Furthermore, insurance companies deposit their funds in usurious banks and invest in bonds that carry prohibited interest.

The researcher believes that the perspective of those who prohibited it focused on the partial analysis of the insurance contract and the comparison between what the insured pays and what he will benefit from, thus basing their ruling on gharar, qimār, and ribā. Conversely, the view of those who permitted it focused on the holistic analysis of the insurance contract and the intended purpose of the policyholders, considering security (amān) to be the object of the contract. They disregarded the suspicion of gambling, arguing that the insurance company looks not at the contract with a single individual, but at the collective group. Dr. Al-Miṣrī, therefore, considered gharar to be on two levels: it exists in the relationship between the single insured and the company, but it diminishes in the relationship between the group of insured parties and the company, according to the Law of Large Numbers and actuarial calculations that help determine the net premium. The large number of participants transforms the possibility from an uncalculated probability to a calculated one.

Shaykh Muṣṭafā az-Zarqā sought to interpret the commercial insurance contract as a cooperative commutative contract where the collective group of insured individuals seeks to compensate the damaged party among them. The company then takes its profit from the insurance surplus (the difference between the balance of the insureds' premiums and the compensation paid for damages).

The researcher believes the fundamental problem in commercial insurance lies in the basis for the company's entitlement to its profit. The company commits to compensating the insured for the effects of the insured risk if it occurs. This commitment generates the security that Shaykh Az-Zarqā spoke of. The company becomes entitled to its profits if the insured risk does not occur. This involves a number of Shariah prohibitions:

• Suspending the company's compensation upon risk, which involves the prohibition of excessive gharar. The company commits to guaranteeing the loss upon the occurrence of the risk in exchange for the insured paying premiums.

• If the risk does not occur, the paid premiums are considered profits for the insurance company. This involves another Shariah prohibition, which is taking a fee for guaranteeing (ḍamān), which is prohibited by consensus.

The basis for the commercial insurance company's entitlement to profits is risk and uncertainty (gharar). This differs from the basis of profit for Islamic cooperative insurance companies (as will be shown), which is entitlement to a fee for managing the insurance pool or profit from investing the funds in the pool. If the foundation upon which commercial insurance is based were sound, the existence of gharar might be excused. This means the problem lies in the structure of the commercial insurance contract, not in the idea of insurance itself.

Thus, Government Social Insurance schemes conducted by states for citizens can be justified. They constitute a Takaful (mutual guarantee) system aimed at social and economic protection for individuals and are not based on making profit from the insurance operation, unlike commercial insurance companies. Government social insurance, like social security, is based on the state's duty to provide a decent life for its citizens and safeguard the public interests of the community, and on the principle of cooperation and mutual support among the participating citizens.

Therefore, the issue of the commercial insurance contract has been resolved by the Fiqh academies. Instead of trying to rectify the invalid conditions in commercial insurance contracts and policies, attention has turned toward Cooperative Insurance, its juristic classification, Shariah conditions, and practical application. The debate over the ruling of commercial insurance has thus become a theoretical discussion.

The System of Insurance in Islam

The idea of the insurance system—as explained by Professor 'Abd ar-Razzāq as-Sanhūrī—is based on organized cooperation among a group of people to avert and fragment risks. If some of them face a risk, everyone cooperates in confronting it through a small sacrifice made by each person, thereby averting huge losses. This has been applied in human civilizations since ancient times.

The insurance system is considered an acceptable idea in Islam and is consistent with the principle of cooperation in righteousness and benevolence (at-Ta'āwun 'alā al-Birr wa al-Iḥsān) called for by Islam. There are many rulings in Islamic Law based on mutual guarantee (Takāful) and solidarity, such as the system of maintenance (Nafaqah) for the family, mandatory maintenance for relatives, the 'Āqilah (shared liability) system for blood money (Diyyah), the Zakāh system, the system of Ṣadaqah (charity) in the cause of Allah, and the Waqf (endowment) system, in addition to the duty of the state and the Public Treasury (Bayt al-Māl) to provide a dignified life for individuals and achieve social security for them.

Several permissible forms of the insurance system sanctioned by Islamic Law have been documented:

• The story of the Ash'arī tribe, who built a cooperative system at the tribal level. Abū Mūsā al-Ash'arī (may Allah be pleased with them both) narrated that the Messenger of Allah (peace be upon him) said: "When the Ash'arīs ran short of provisions in the campaign or the food of their families ran short in Medina, they would collect all that they had in a single garment, and then divide it equally among themselves in a single bowl. They are from me, and I am from them." (Reported by Al-Bukhārī).

• Also, the story of the military expedition led by Abū 'Ubaydah and his order to gather the army's food to be divided equally. Jābir ibn 'Abdullāh (may Allah be pleased with them both) said: "When the Messenger of Allah (peace be upon him) sent an expedition towards the coast and appointed Abū 'Ubaydah ibn al-Jarrāḥ over them, they were three hundred. We set out, and at some point on the way, the provision ran out. Abū 'Ubaydah ordered the provisions of the army to be collected, and my provisions were two bags of dates. He would feed us little by little every day." (Reported by Al-Bukhārī). Imam Al-Bukhārī commented on the two previous narrations: "The Muslims saw no harm in An-Nahd." An-Nahd is the custom where companions pool their travel expenses, mix the expenses together, and spend from them collectively, even if they eat different amounts. At-Tanāhud (pooling of expenses) is a system practiced by the Companions and affirmed by Islamic Law.

Many contemporary forms can be derived from At-Tanāhud that are applied today, such as Takaful funds established at the tribal level, or Takaful funds established among members of the same profession, or Takaful funds established among employees of the same ministry. This creates a relationship of mutual guarantee and cooperation among the participants in those funds, which is affirmed by Islamic Law.

Therefore, a distinction must be made between the System of Insurance and the Contract of Insurance. The insurance system does not conflict with the objectives and texts of Islamic Law. However, the contract of insurance has issues in its formulation. The commercial insurance contract was formulated in light of capitalist thought, which does not recognize non-profit activities as a sector of the economy. Commercial insurance companies' profit originates from the insurance operation itself. Islamic economic thought, conversely, takes a balanced view that combines both profitable and non-profitable activity, making the insurance contract a cooperative Takaful activity not intended for profit. Instead, the basis for entitlement to profit arises from providing management services or investment services for the funds in the insurance pool. Thus, Islamic economic thought distinguished itself by making the insurance contract based on the principle of cooperation and mutual guarantee, not on the principle of profit.

The Cooperative Insurance Contract

Cooperative insurance is of three types:

1. Simple Cooperative Insurance: This consists of a group or association formed by individuals with a specific craft or trade to avert losses arising from a risk threatening them or their profession. The members of the same craft agree that each person deposits a sum of money with one of them, which is then disbursed upon the occurrence of a loss, fire, or other risk. This type exists in all human civilizations and gatherings, and the Arabs knew it and were affirmed upon it by Islamic Law, as mentioned previously.

2. Compound Cooperative Insurance: This involves a specialized company in cooperative insurance work, where all the insured parties are shareholders in this company, forming the general assembly and the board of directors. This type began to be applied in Europe in the 15th and 16th centuries CE in Germany as mutual insurance associations, and then spread throughout Europe and also in the Soviet Union. It differs from Islamic insurance companies in that every insured is considered a shareholder, while in Islamic insurance companies, the shareholders' account is separate from the insureds' account, in addition to the requirement of adherence to Shariah rulings, including the matter of dealing with usurious banks.

3. Islamic Cooperative Insurance (Takaful):

The search for a Sharia alternative to commercial insurance companies began in the mid-20th century. The Islamic Jurisprudence Week was held at the University of Damascus in 1961 CE, where Dr. Aṣ-Ṣiddīq aḍ-Ḍarīr presented a paper that prohibited commercial insurance and permitted cooperative insurance. Aḍ-Ḍarīr considered the premiums paid by the participant as a donation (Tabarru') from him to the company, to be paid to those participants who need it, according to the agreed-upon system. Thus began the juristic classification of cooperative insurance as a donation contract. This was followed by the resolution of the Fiqh Council of the Muslim World League in 1977 CE and the resolution of the Islamic Fiqh Academy of the Organization of Islamic Conference in 1985 CE, all affirming that cooperative insurance is based on donation and cooperation. This approach was adopted by many researchers, jurists, Shariah boards, and most Islamic cooperative insurance companies.

However, several jurists and researchers raised issues regarding the classification of cooperative insurance as a donation, arguing that the insured pays the premium with the aim that the cooperative insurance fund will repair any damage incurred by the participants (of which he is one), and with the aim that the fund will compensate his loss as well if it occurs. Were he not included in the compensation, he would not have participated in the first place. This gives cooperative insurance a semblance of commutative contracts.

A new type of Islamic cooperative insurance company emerged in Pakistan, based on the Waqf (Endowment) formula. This classification is attributed to Dr. Muhammad Taqi Usmani, who first formulated and championed it. It is based on the permissibility of endowing cash and the permissibility of the endower benefiting from his endowment, which is the doctrine of the Ḥanafīs and Ḥanbalīs. The insurance company establishes a Waqf fund whose assets are an endowment for the damaged participants in the fund according to the fund's regulations. The company acts as the supervisor (Nāẓir) of the Waqf fund, and the participants' premiums are considered a donation that leaves their ownership and enters the ownership of the Waqf fund. The compensation received by the participants is considered an independent grant from the Waqf fund because they are included among those endowed upon, according to the conditions of the Waqf.

This experiment was applied in Pakistan, Malaysia, Saudi Arabia, and South Africa, but it did not spread because the nature of Waqf law is incompatible with the nature of the insurance market, as Waqf jurisprudence is not flexible, while the regulations and rules of cooperative insurance companies are based on flexibility. This led to the generation of Shariah obstacles and increased the cost of insurance.

There was another juristic trend that sought to move away from both donation contracts and commutative contracts, proposing that the classification of Islamic cooperative insurance be based on the contract of pooling expenses (Munāhadah) and partnership in cooperation for mutual support (Muwāsāh) among the insured. Dr. 'Alī al-Qarahdāghī was the first to propose this classification, which was adopted by the European Council for Fatwa and Research and a number of researchers. This is the conclusion reached by the resolution of the International Islamic Fiqh Academy of the Organization of Islamic Conference in its twenty-first session in 2013 CE. The resolution stated: "The relationship between the participants in the fund is one of cooperation among a group of people in paying specific amounts to redress harm or achieve benefit that may afflict any one of them. This cooperation is based on magnanimity (musāmaḥah), mutual support (muwāsāh), and the granting of permission for the rights of one another, and is not based on commutation, contention, and the intent to profit."

The researcher believes that the final resolution of the Academy has resolved the juristic complexities that revolved around the formulas of Islamic cooperative insurance, establishing it upon a general principle consistent with Islamic economic thought and the rules of Islamic Law.

Conclusion:

The System of Insurance is a matter agreed upon among religions and people of intellect and thought, which is why humanity has turned to it since ancient times, and its applications and models have multiplied. Islamic Law affirmed a number of applications that were prevalent during the era of Revelation. In later eras, a model of insurance emerged based on private companies that profited from the insurance operation. This model was based on capitalist thought which does not recognize the non-profit sector as an economic sector. Contemporary jurists differed on its permissibility, but the Fiqh academies resolved its ruling and proposed, instead, a set of insurance contracts, including the contract based on Donation (Tabarru'), the contract based on Endowment (Waqf), and the contract based on Pooling Expenses (Tanāhud) and Partnership in Cooperation and Mutual Support. The International Islamic Fiqh Academy of the Organization of Islamic Conference ultimately concluded that Islamic Cooperative Insurance is based on the principle of Cooperation.

 

(*) An article published in Al-Wasatiyyah Magazine, Issue 45, Year 13, September 2025.