Under Islamic jurisprudence, the core principle of insurance is not forbidden, rather it is encouraged. In fact, Islamic Insurance, more commonly known today as “Takaful” has a long history dating back to the 8th century. Takaful is an alternative to conventional insurance and is based on the concept of Ta'awun, or mutual assistance. Through Takaful, members mutually agree to contribute monies to support a common goal of assurance.

Conventional insurance is structured as a contractual relationship between an insurance company and consumers where in exchange for a fee the insurance company agrees to compensate a policy holder in the event of loss. The concept of paying another party a fee in order to “transfer risk” is prohibited under Shari’ah principles because it introduces “gharar” (extreme uncertainty as to essential elements of an agreement) and “maisir” (gambling”) to the transaction.

Takaful on the other hand involves “the sharing of risk” in which participants all agree to subsidize each other’s risks through a pool of contributed funds. In a Takaful structure the insurance company does not assume the risk of the participants, but simply plays the role of an “Operator” who oversees the management and administration of the pool of funds. In the event one of the members has an unforeseen incident that involves a loss, monies from this segregated pool are used to help carry the burden of that loss. This fund acts as a safety net in the event that one of the donating members would need to tap into it. Since the insurance company is not being contracted to assume losses (which may or may not happen) and participants are making a voluntary contribution to a pool, rather than paying another party to transfer risk, Takaful structures do not involve “gharar” or “maisir”.

Along with this, conventional insurance structures violate Shari’ah principles by deriving income from impermissible activities such as investment in interest bearing instruments (“riba”), alcohol, pork, pornography and casinos. Under a Takaful structure the Operator will only invest the pooled funds in Shari’ah compliant investments that are screened and approved by a Shari’ah board.

It is these core principles that make Takaful accepted under Shari’ah Law and its conventional equivalent forbidden.

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