Classically, scholars categorized contracts as being from one of three types.
- Commutative exchange (Mu’awaDat معاوضات) – Involving the voluntary exchange of good, services, and/or both for the purpose of trade. Includes: cash sales, bartering, and currency exchange.
- Charitable exchange (Tabaru’at تبرعات) – Involving the voluntary not-for-profit exchange of good, services, and/or both out of the goodwill of the giver. Includes: monetary loans, material loans, gifts, and will & testament etc.
- Contracts of record/certification (Tawthiqat توثيقات) – The recording of a right or claim of one party against another. Includes: Liens, pawn certificates, debt records, Kafala, etc
When the question of insurance presented itself to the Muslim world, scholars generally took the position that commercial insurance was prohibited. They based this on the perceived obscurity (Gharar) and gambling (muqamarah) involved in the transaction. A small minority differed with this verdict, permitting all forms of insurance; this opinion however was built more on the permissibility of invalid contracts in certain circumstances rather than a full-fledged theory of insurance. Almost alone in his permitting commercial insurance was Mustafa al-Zarka, a premier Hanafi jurist of the last decade.
On the other hand, most allowed mutual insurance. Mutual companies are owned by the policyholders, while stockholders (who may or may not own policies) own stock insurance companies. A mutual company is, in the simplest terms, where all parties are members of an insurance ‘guild’ contributing to the ‘pot’. These contributions are charitable in nature and are seen as the the collective right of the guild, in which everyone agrees that if one member is faced with adversity or some loss that the money collected will be used to offset that loss.
Now for the problem
When scholars speak on the permissibility of insurance, they usually do so from the viewpoint of the insured. Hardly ever do you hear of criticism of the insurance industry as a whole, and the pricing schemes involved. We are told that commercial insurance is Haram, and that we should all go out and get mutual insurance.
This one-sided solution to the problem of insurance, if not obligated by the authorities, leaves many people high and dry with regards to protecting their personal and business interests.
As a quick side note, in classical Islamic legal discussions, compensation for losses accrued by an individual or a group of investors through natural disasters and unforeseen events beyond their control were usually compensated for by the institution known as “Bayt al Mal” or the state treasury, if not they were taken up by the persons tribal allegiances. The state had the responsibility to ensure the livelihood of its citizens, in that it is the authority which collects zakat, taxes, spoils of war, and is entrusted with the natural resources of the state and the revenue received from them.
Back to the issue of contracts, when we look at insurance practices, and if in fact insurance of any type was a commutative exchange, then if canceled or renewed there should be the option to receive back that money that was ‘contributed’ to the deal. As far as I know, you can not do this with most insurance packages. In this case, you are essentially giving away a portion of you wealth in hopes to receive compensation in the face of future losses without expecting the principle contribution back; exactly what is claimed in the case of Mutual insurance.
If this is the case, there would seem to be no difference between commercial and mutual insurance; in both you will end up receiving the same compensation and in both you will pay a similar amount. What does seem to be of consequence is the use of that money by the insurance company, their ability to cancel the policies of their clients, and their secondary investment of that money for their own profit.
The permissibility of insurance (or lack thereof) would seem to lie in regulation of the industry itself, not in the character of the end-user agreement.
Here’s an example that should bring it a little closer to home:
In silent partnerships (Mudaraba), partners are to share equally in the profit and loss of the partnership. If say, the silent partner specifies for himself some form of profit to the exclusion of the other (who here is performing the ‘work’ involved), then scholars held two opinions as to how the profits should be distributed in the face of this invalid condition (calling this MuDarabah Fasidah مضاربة فاسدة). Some said that this partner should be given salary commensurate to his work. Others said that he should receive the profit commensurate to that which a partner similar to him would receive. The point here is that the working party receives compensation for that which he entered the contract for initially, whether it be profit or salary.
If we were to characterize insurance contracts as a form of silent partnership, or at least hold them in the same light, then the contract is invalidated from one side only, not both. The main issue we should be concerned with then is regulation, and not one pertaining to the permissibility of the end-user entering into such as agreement.
In this case, it shouldn’t matter to the end-user as to what type of insurance he buys, to what extent he insures his property, and to what extent he receives compensation for his losses. In the end of the day it is all the same, he will receive compensation commensurate to his losses; but will the Insurer receive compensation commesurate to his effort? I suspect that in both commercial and Takaful structures some form of price gouging happens.
Just as the state should guarantee fair business practice and fair compensation, it should regulate the insurance industry accordingly.