Islamic Insurance: An Introduction Ausaf Ahmad Islamic cultural Center May 04, 2008

WHAT INSURANCE IS ALL ABOUT? Some recapitulations Insurance is a process that spreads risk. Insurance is a process that spreads risk. (millions of cars, lives, houses, factories) (millions of cars, lives, houses, factories) uncertain events.( theft, death, sickness, fire) uncertain events.( theft, death, sickness, fire) Law of large numbers. Law of large numbers. The law of large number makes the pooling of risks possible. The law of large number makes the pooling of risks possible.

WHAT INSURANCE IS ALL ABOUT? Some recapitulations (contd.) Insurable and non-insurable risks. Price fluctuations are non insurable. Flood or drought is insurable. Insurable and non-insurable risks. Price fluctuations are non insurable. Flood or drought is insurable. Two important preconditions: Two important preconditions: A: There must be a large number of events. A: There must be a large number of events. B: The uncertain events must be relatively independent. B: The uncertain events must be relatively independent.

Islamic Criticism to Commercial Insurance Involvement of Riba Involvement of Riba Resemblances to Gambling Resemblances to Gambling If these two defects are removed, then probably there is no objection to Insurance as the Law of Large Numbers is a statistical law. If these two defects are removed, then probably there is no objection to Insurance as the Law of Large Numbers is a statistical law.

Characteristics of Islamic Insurance Riba-free investments Riba-free investments No deception (i.e. transparent and clear definition of benefits and charges) No deception (i.e. transparent and clear definition of benefits and charges) No profit to the Takafol company from favour able mortality experience No profit to the Takafol company from favour able mortality experience Based on solidarity principles rather than probabilities (principles of gambling) Based on solidarity principles rather than probabilities (principles of gambling)

Characteristics of Islamic Insurance (contd.) In order to comply with the above rules, the Takafol policyholders' funds were invested in short term assets without any fixed interest or guarantee of capital and the mortality risk was shared on a solidarity basis so that any loss or profit due to mortality was shared between the policyholders. However, the Takafol savings products only offered a small death cover, which limited their appeal to prospective customers. In order to comply with the above rules, the Takafol policyholders' funds were invested in short term assets without any fixed interest or guarantee of capital and the mortality risk was shared on a solidarity basis so that any loss or profit due to mortality was shared between the policyholders. However, the Takafol savings products only offered a small death cover, which limited their appeal to prospective customers.

Characteristics of Islamic Insurance Takaful is Islamic Insurance Takaful is Islamic Insurance Meaning of Takaful Meaning of Takaful Solidarity is the basis of Islamic Insurance Solidarity is the basis of Islamic Insurance Cooperate with each other on the basis of good will (bir) and fear of God (Taqwah) and do not cooperate with each other in rancor and sin. Cooperate with each other on the basis of good will (bir) and fear of God (Taqwah) and do not cooperate with each other in rancor and sin.