a) it includes an element of al-gharar (uncertainty)
b) it is based on the theory and practice of interest; a conventional life insurance policy is based on interest, while an Islamic model is based on tabarru where a part of the contributions by participants are treated as donation. For this reason, policy holders in takaful are usually referred to as participants.
c) it is a form of gambling.
First and foremost, Islamic insurance, in conformance with the Islamic Shari'ah, is a form of social solidarity (takaful), based on the principles of trusteeship and co-operation.
1) In conventional insurance, the insured substitutes certainty for uncertainty. In return for a predetermined payment, the premium, he/she transfers to the insurer the possible economic losses from stipulated risks. In Islamic insurance, the participants share all risks mutually and no transfer of risk is involved.
2) Conventional insurance companies are motivated by the desire for profit, while Islamic insurance companies are non-profit making, the shareholders not being entitled to share in the profits of the business although they are entitled to charge fees for their services and share in the investment returns of funds managed by them
3) The policy-holders in a conventional insurance company have no right to vote in the elections of the directors of the company or to see the annual accounts of the company, while in Islamic companies; these facilities are available to all participants who pay a certain stipulated amount of premiums (contributions).
4) In the takaful system, if the assured dies before the policy matures, the beneficiary is entitled to the whole amount of the premiums, the bonus and dividend and a share of the profits made over the paid premiums, plus a donation from the company out of the participants/policy-holder's contributions given on the basis of tabarru. Such a transaction is seen as a mutual contribution towards the welfare of the helpless in society. Where the insured is still alive on the maturing of the policy, he/she is entitled to the whole amount of the premiums, a share of the profit made over the premiums, a bonus and dividends according to the company policy.
5) In a conventional life insurance policy, the agent's payments are paid out of the insured's paid premiums, whereas in the Islamic model, the agents work for the company and thus are paid by the company.
6) The insurable interest in the conventional system is usually paid to the policyholder, if he/she is alive at the expiry of the policy. If he/she dies before that date, the insurable interest is paid to the beneficiaries, who may include including family, servants, company, trustee, partners, mortgagor, etc. But under the Islamic model, the insurable interest goes to the assured or his/her heirs, according to the principles of Mirth or Wasiyyah.
Co-operative Insurance
The concept of co-operative insurance is acceptable in Islam because:
a) The policyholders co-operate actively for their common good;
b) Every policyholder pays his subscription in order to help those who need it;
c) It spreads liability in the community by a pooling system;
d) It does not aim at deriving undue advantage for one at the cost of other individuals;
e) The element of uncertainty is eliminated as far as determination of the premiums is
concerned.
An Islamic co-operative insurance contract should embody the following conditions:
a) The company functions according to Islamic co-operative principles.
b) The policyholders have the right to participate in surplus profits and are liable to contribute additional amounts if their subscriptions are not sufficient to meet all the losses. However, it is preferable for such losses to be written off against future surpluses. Shareholders are not entitled to any of the underwriting profits generated by the insurance operations. But, as mudarib (agents), they are entitled to receive a proportion of the profits from the investment of insurance funds, plus, of course, all the profits on the investment of their own capital and any other funds and reserves attributable to them.
c) The company will strictly follow Islamic laws in the matter of investment and will not indulge
in the practice of usury.
d) Policyholders are represented on the Board of Directors and have a right to scrutinise its
accounts.
Gambling and Insurance
There are three main differences between a gambling contract and an insurance contract.
a) In a gambling contract, neither party has any other interest than winning a sum of money. The gambler is not being indemnified against any loss. But, in an insurance contract, the insured's right to be paid depends on his suffering loss from the insured peril. In other words, an insurance contract is a contract of indemnity, which is non-existent in a gambling contract.
b) In the case of gambling, one party must win and the other loses. In insurance, on the other hand, the event entitling the insured to compensation may or may not happen during the period of the policy, but he pays a premium for being protected during that time.
c) If a gambler wins, he gets back not only his original stake but also an additional amount without suffering any loss, whereas an insured person never gets back his premium and is only indemnified to the extent that he has suffered damage.
