Subject : The Difference between the Islamic Insurance and Commercial one
Fatwa Number : 2994
Date : 13-10-2014
Classified : Current Financial Issues
Fatwa Type : Search Fatawaa

Question :

What is the ruling on comprehensive insurance ? Is there a difference between commercial insurance companies and Islamic insurance companies ?

The Answer :

All perfect praise be to Allah. Blessings and peace be upon Prophet Mohammad.

It is permissible to insure with companies that adhere to the rulings of Islamic Law (Sharia) based on the principle of contribution as well as cooperative insurance with its Islamic regulations; whereas, insuring with commercial insurance companies that don`t adhere to the Islamic insurance system is unlawful.

In order to draw a distinction between what is lawful and what is unlawful, we must review the contracts and articles which govern the transactions of the company so as to know their validity and adherence to the rulings of Sharia.

It stated: “Islamic insurance is an agreement among individuals subjected to certain risks to avoid the damages resulting from those risks.

This is achieved through paying obligatory contributions which constitute an insurance fund that enjoys a corporate body and an independent financial disclosure. This fund compensates the contributors in case damage resulted from the risks they are insured from, and that is in line with the regulations and contribution documents. The fund is to be run by a number of the contributors, or a shareholding company in return for a fee, where it manages the insurance transactions and invests the fund`s assets.

As regards traditional insurance, it is a contract of financial compensation that aims at making profit from the insurance itself. Rulings of financial compensations apply to this type of insurance which is influenced by trickery. From the view point of Sharia, this type of insurance is unlawful.

However, Islamic insurance rests on the following Islamic principles which must be stipulated in the company`s memorandum and articles, or its regulations and documents:

First: Adhering to contributing where a contributor gives the contribution and its returns to the insurance account for paying the compensations. He may also be liable to make up for the deficits in line with the adopted regulations.

Second: The insurance company in question opens two separate accounts, one for itself: its rights and obligations, and one for the fund (contributors): their rights and obligations.

Third: The company acts as a proxy in running the insurance account and venture, or in investing the assets of the insurance.

Fourth: The insurance account is in charge of the insurance assets, their returns, and the fulfillment of their obligations.

Fifth: It is permissible that the adopted regulations include disposing of the surplus in line with what is best for interest, provided that the managing company takes nothing out of it.

Sixth: Giving all the insurance payments and the accumulated surplus to charity upon the liquidation of the company.

Seventh: The contributors are given precedence in running the insurance operations.

Eighth: The company adheres to the rulings of Sharia in all its activities and investments; particularly, not insuring all that is forbidden.

Ninth: Appointing an Islamic monitoring body whose Fatwas (Sharia rulings) are binding to the company, and that there must be an Islamic management and control bureau.” [Al-Ma`ayeer Ash-Shariah, pp.364].

Accordingly, Insuring with Islamic insurance companies is permissible in principle as long as they adhere to the above conditions. And Allah Knows Best.



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