It is an undeniable fact that we live in a world where on a daily basis, we are exposed to risks and dangers that threaten the safety of our lives and wealth. In the face of these dangers, some people have resorted to insurance schemes in order to secure themselves against potential future losses. However, all prevalent forms of conventional insurance have been ruled as prohibited in Islam.
Some argue that the impermissibility of the current methods of insurance is due to insurance contradicting the concept of tawakkul (placing one’s trust in Allah تبارك و تعالى). However, this notion is incorrect, as taking a precautionary measure to save oneself from harm does not contradict the concept of tawakkul in any way. Shariah does recognize adopting protective measures when anticipating harm. However, just as all other aspects of our life must conform to Shari’ah, similarly the measures of precaution that we take must conform to the principles of Shari’ah and should not, in any manner, exceed the limits prescribed by the Quraan Majeed and Sunnah.
After scrutinizing the various forms of conventional insurance schemes which are prevalent today, the Ulamaa have concurred that these insurance schemes violate the principles of Islam as they contain the elements of riba (interest) and qimaar (gambling). These two elements render the contract invalid, as stated by the Fuqahaa.
The definition of gambling, according to all the four mazhabs, is for one to pay for something which he is uncertain of acquiring.
In the case of gambling, one spends a certain amount of money in the hope of gaining something which he is uncertain of acquiring. There is a possibility of him losing all his money and acquiring nothing, and there is also the possibility of him acquiring more or less than what he had initially spent. Through this definition, it is clear that gambling is not confined to casinos and gambling dens. Rather, gambling is also existent in any contract where one pays for something which one is uncertain of acquiring.
The insurance of houses, cars or other goods with conventional insurance companies is a commercial transaction in which the person who wants to insure his goods is bound to pay a premium to the company in accordance with the prescribed conditions of the insurance contract. This payment is certain, and without it, insurance is not possible. On the other hand, the payment by the company is not certain. It is contingent upon an event or accident which may or may not occur. If the accident takes place, the company is bound to pay an amount. In the case where an accident does not take place, the company does not pay him anything and the premiums paid by him go without any return. In other words, the client is bound to pay in all cases while the company may or may not pay. Transactions of this nature are termed gimaar (gambling) and are strictly prohibited in Shari’ah.
Moreover, if an accident occurs, the amount paid to the insured by the insurance company is in lieu of the amount paid as premiums. Based on the extent of the damage and the amount covered in the insurance policy, one may receive more or less than the amount that he had paid to the insurance company (in monthly premiums). It is an accepted principle of Shari’ah that when money is exchanged for money, both the amounts should be equal in quantity. Hence, in the case where one receives more than the amount that he had paid to the insurance company, the extra amount that he receives is riba (interest) which is clearly prohibited by the Quraan Majeed and Hadith Shareef.
It is for these two reasons that all prevalent forms of conventional insurance have been ruled by the Fuqahaa as prohibited in Shari’ah.
(Business and Commerce in the Light of Islam pg. 595-596)