Application of Sharia Principles in Insurance

Abstract

As Muslims everything that we do must be in accordance with Islamic law or Shari'a appropriate. Be it in terms of muamalah or the other. I would like to highlight in this paper is the application of Sharia law in insurance. is it possible? how? Please refer to the following paper

Introduction

Premium or contribution in a Takaful contract is a form of monetary consideration (al-‘iwad) from the participant’s part, which is an obligation arising from a contract between the participant and the operator. An insurance contract is a contract of mutual co-operation in which the consideration is required not only from one party but from both parties, in which the operator is unilaterally bound by the contract. The obligation of the settlement of the respective considerations in a transaction of a mutual co-operation is justified by the commandment of Allah (s.w.t.) Al-Maidah (5:2)

This ayat of the Holy Qur’an renders a duty to mankind to provide their mutual co-operation on bilateral basis. Furthermore, in an insurance contract once the policy is concluded, the participant is regarded as a principal debtor and must settle the agreed-contribution to the operator accordingly. In such a transaction the participant is under a duty to pay the contributions regularly according to the terms and conditions as stated in the policy. An insurance policy is a binding contract, and therefore the performance of consideration from both parties, (the participant and operator) through the payment of contribution (by the participant) and the indemnification (by the operator) are obligations which must be fulfilled.

Syariah Principles in Insurance

Principles of Contract

An insurance policy binds the parties unilaterally by an offer and an acceptance in reliance on the principles of contract. The fundamentals required in an insurance policy are the parties to the contract, legal capacities of the parties, offer and acceptance, consideration, subject matter, insurable interest and good faith, most of which are found in the general type of contracts.

Principles of Liability

An insurance policy covers losses arising from the death, accident, disaster and other losses to human life, property or business. The insurer (insurance company) undertakes in the policy to compensate against the losses to the agreed subject matter. Such undertaking is considered as vicarious liability. For instance, in the case of ‘Aqilah practised in the ancient Arab tribes approved by the Holy Prophet (s.a.w.) if a person was killed by another from a different tribe either mistakenly or negligently, this would bring a liability to the members of his tribe to pay blood wit to the heirs of the slain.

Principle of Utmost Good Faith

In an insurance contract, for the enforcement of the policy, the parties involved in it should have good faith. Therefore, non-disclosure of material facts, involvement of a fraudulent act, misrepresentations or false statements are all elements which could invalidate a policy of insurance.

Principles of Al-Wakalah (Agencies)

The appointment of the agent by the insurer and the broker by the insured are of utmost important. In fact, such appointments are widely practiced for the purpose of making the transaction and dealings between the insurer and the insured more effective.

Principles of Dhaman (Guarantee)

In an insurance policy, the insurer undertakes to provide material security for the insured against unexpected future loss, damage or risk. The idea of such guarantee is justified by the principles of ‘Dhaman’ or guarantee under Islamic law. In Fiqh, insurance can only be classed under Dhaman (guarantee), which is governed by some essential conditions. Among them the guarantor can only take upon himself a liability which has fallen or may possibly fall upon a person or property.  Thus, Dhaman or guarantee may only be payable to the victim or if the victim dies, to his legal heirs, according to their respective shares in inheritance.

Principles of al-Mudharabah and al Musharakah

The operation of an insurance policy under Shari’ah is in fact based on the principles of al-Mudharabah financing, which is an alternative to the contemporary interest-based transaction. In such financing, one person provides the capital while the other party contributes business skills and both parties mutually agree to share the profits accordingly. However, an insurance policy, is a transaction wherein both parties agree that the participant pays regular contributions and the operator invests the accumulated contributions in a lawful business, in which both the insured and the operator share the profits in an agreed portion. At the same time, the insurer also undertakes to provide the insured with compensation (in consideration of the paid-contribution) against an unexpected future loss or damage occurring on the subject matter of the policy. This is how the principles of al-Mudharabah financing in an insurance policy. An insurance policy also operates on the basis of the principle of ‘al-Musharakah as both the operator and the participants are partners in the policy run by the insurance company.

References:

• Mohd. Ma’sum Billah, 2001, Sources of Law Affecting ‘ Takaful’ (Islamic Insurance), International Journal of Islamic Financial Services Vol.2 No.4
• Mohd. Ma’sum Billah, 2001, Takaful (Islamic Insurance) Premium: A Suggested Regulatory Framework, International Journal of Islamic Financial Services Vol.3 No.1 
• Uddin M. Musleh, Concept of Civil Liability in Islam and the Law of Torts, Islamic Publication Ltd. Lahore, 1982 at 62
• Government of Pakistan, Council of Islamic Ideology, Offences against Human Body, (Enforcement of Qisas and Diyat) Draft Ordinance, 1981