Shariah and Security: The Role of Insurance in Islamic Finance

The UK insurance market is one of the largest in the world, with London being a global hub for insurance and reinsurance business. This industry not only contributes significantly to the UK economy but also plays a role in managing risks, thus providing stability and security to other sectors. As of 2020, it led Europe in terms of total domestic insurance premiums, making it the largest insurance market on the continent. Globally, the UK ranked fourth in terms of life and non-life direct premiums, railing only behind the U.S., China, and Japan. ¹

In terms of structure, the UK's insurance industry bifurcates into life and non-life insurance segments. Life insurance in the UK covers a range of significant life events, extending beyond death to include scenarios like disability or terminal illness. The expenditure on life insurance by UK households reached its highest in 2006, maintaining a steady level from 2019 to 2021. On the other hand, non-life insurance encompasses protection against property damage, business-related risks,
and, in most cases, private health insurance. The UK recorded non-life insurance premiums of 116 billion euros, positioning it second in Europe for the highest value of premiums written. ²

Focusing on market leadership within the UK, the country boasts several key players in Europe's insurance landscape. Prominently, three of the top ten life and health insurance companies in Europe, as of May 2023, are based in the UK. Aon, Prudential, and Willis Tower Watson stand out in this group, with a combined market valuation surpassing 130 billion U.S. dollars. These leaders are accompanied by other major European insurers from countries such as Germany, Switzerland,
France, Italy, and Belgium, based on gross written premiums. ³

A Brief History of insurance

The origins of the UK insurance industry can be traced back to the Elizabethan era. During the 16th century, as British maritime trade expanded, the need for marine insurance grew. Merchants and shipowners sought ways to mitigate the financial risk of sea voyages. This period marked the preliminary stages of formalized insurance practices in the UK, primarily focused on maritime risks. ⁴

One of the most significant developments in the history of UK insurance was the establishment of Lloyd's of London in the late 17th century. Originally a coffee house owned by Edward Lloyd, it became a meeting place for merchants, shipowners, and those willing to underwrite (insure) ships and cargo. This informal gathering laid the groundwork for what would become one of the world's leading insurance markets. ⁵

By the 18th century, the scope of insurance in the UK began to expand beyond marine risks. This period saw the emergence of fire and life insurance. The infamous Great Fire of London in 1666, which resulted in massive property damage, highlighted the need for fire insurance. This led to the formation of the first fire insurance companies. ⁶

In the 20th century the two World Wars had a significant impact on the UK insurance industry. The wars brought about unprecedented levels of destruction, death, and injury, leading to huge insurance claims. These events evaluated the resilience of the industry and led to the development of new forms of insurance, including various liability and war risk covers. ⁷

In the post-World War II era, the UK insurance industry underwent significant expansion and diversification. The economic boom and the rise in consumerism led to an increased demand for various types of insurance, including motor, travel, and health insurance. This period also saw the growth of reinsurance.

The late 20th and early 21st centuries have been characterized by technological advancements and globalization. The UK insurance market has not only grown domestically but has also expanded its global footprint, dealing with international insurance and reinsurance. The advent of the internet and digital technology has transformed the way insurance products are marketed, sold, and managed.

This traditional form of insurance, evolving through centuries, became a cornerstone in managing financial risks associated with life, property, and businesses. The concept revolved around pooling resources to protect against losses, a principle that resonated across various cultures and economies evolved into the conventional insurance we have today based on the transfer of risk from the insured to the insurer for a premium.

However, as this traditional insurance model spread globally, it encountered diverse cultural and religious perspectives, leading to unique adaptations and alternatives.

What are the Components of a Modern Conventional Insurance Contract?

A modern conventional insurance contract consists of the following noticeable elements:

1. The insurer: Often a company or institution that is obligated to pay financial compensation to the insured when the covered event or risk occurs.
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2. The insured: The individual or entity that holds an insurance policy and is protected under it. This person or organization enters into a contract with an insurer and pays premiums, in a lump sum or installments as agreed, in exchange for financial protection or reimbursement against specified risks or losses.
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3. Coverage: The events or risks that the insured expects could occur in the future, such as a fire accident or a death disaster.
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4. Contractual premiums: This is the sum that the insured is obligated to pay to the insurer.
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5. Coverage Limits: This section specifies the maximum amount the insurer will pay under the policy for a covered loss.
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6. Policy Period: By this, we mean the period covered by the insurance contract. For example, one year from the date of the contract, and the insurance contract ends upon its expiry.

Islamic Considerations regarding Conventional Insurance:

1. The insurance contract is a financial contract of exchange, not a donation or contract of benevolence. Due to it being based on exchange, in which both parties aim to obtain a benefit in exchange for what the other contracting party receives, the insurer is obligated to deliver financial compensation to the contractual entity experiencing realized risk, and the insured is obligated to pay the agreed-upon premium. This differs from a contract of benevolence in which the intent of the transaction is not an exchange, in which the contracting party does not contractually receive a counter-value for what they give. From the perspective of Islamic Jurisprudence, the conventional insurance contract is considered binding upon both parties to the contract at the time of its commencement. Accordingly,
   and given the nature of the contract, the insurer is a creditor from a perspective, and a debtor from another. Likewise, the insured is a creditor from a perspective, and the debtor from another, and these obligations are established by the contract. Consequently, neither of the contracting parties has the right to annul the contract or terminate it unilaterally, unless there is a legitimate or legal permitting it.
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2. Conventional insurance contracts are a modern contract from the perspective of Islamic Jurisprudence, i.e. it is not found in the list of contracts named found in the classical books of Islamic Jurisprudence. For this reason, it is based on diligence and personal reasoning of Islamic Scholarship in devising and deducing the jurisprudence provisions regarding it.
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3. The conventional insurance contract is a speculative or contingent contract from the perspective of Islamic Jurisprudence, and not a specified contract. The reason for this is simply because the risk being insured against is a matter that the insurer and the insured anticipate to happen or not happen in the future. Accordingly, the matter of contractual liability (possible accident/loss) does not exist at the time of contracting, but is considered something that may exist in the future, with its occurrence being beyond the control of any of the contracting parties. From the perspective of Islamic Law, this is considered 'ambiguous',
   (or containing Gharar غرر), and has implications on the ruling of a contract.
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4. Through the lens of Islamic Jurisprudence, a conventional insurance contract is a contract of adhesion (الإذعان), because the insurer is a stronger party to the contract by design as it dictates its will to the counterparty of the contract who is the weaker party, i.e. the insured. Accordingly, The insurer prepares the insurance contract in advance, and the insured has no to little negotiating ability except to sign it and assume the resulting contractual liability. This reality is even more pronounced in insurance contracts that are a result of compulsion, due to laws or contractual conditions stipulating insurance as a part of the governing/transacting rules.

Insurance: An Islamic Perspective

As stated earlier, conventional insurance contracts as they exist today are a modern phenomenon from the perspective of Islamic Jurisprudence. Accordingly, there is no specific evidence from the era of revelation dealing with it specifically. That said, Islam's legal framework which includes controlled Scholarly Legal Reasoning (Ijtihaad) is inherently capable of providing adequate rulings to suffice all occasions until the Day of Judgement. With Ijtihaad, the differences between the jurists in aligning the insurance contract and its conditioning from an Islamic jurisprudence perspective will naturally lead to a difference in ruling. Those who view insurance as
akin to contracts connected to cooperation for good deeds have issued fatwas permitting it. In contrast, those equating it to a contract of exchange have flagged key necessary factors, such as gambling, usury (interest), or an ambiguity regarding it, and accordingly have issued fatwas declaring it prohibited. Additionally, some jurists have explored a middle ground, treating insurance as a conventional contract of exchange while ensuring the counter-value is concluded to be something tangible in order to negate or reduce the contracts associations with gambling, usury, and ambiguity.

The Islamic Ruling on Insurance:

Islamic Scholarship has predominantly differed on the topic of conventional insurance based on two views:

The First View: conventional Insurance is Forbidden in Islam from the outset ⁸ : This view is shared by the vast majority of contemporary Islamic Scholarship across the
spectrum of the four major schools of Islamic Jurisprudence (Mathaahib). ⁹ The foundations for their collective verdicts are encapsulated as follows:

1. Conventional Insurance entails an ambiguous transaction, the likes of which were prohibited by the Messenger (saw), for He (saw) "forbade ambiguous trade." ¹⁰
   The ambiguity arises from the fact that the event being insured against, at the time of contract initiation, is uncertain—it might happen in the future, or it might not, and its occurrence or non-occurrence is beyond the control of the parties involved in the contract. From an Islamic Jurisprudence perspective, this would entail a level of ambiguity that is unforgivable contracts that involve financial compensation.
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2. A conventional insurance contract is akin to gambling, creating a zero-sum situation where one party's gain is contingent on the other's loss. A positive-sum outcome is inconceivable; because if the insured pays a premium and then an accident happens, the insurer must pay the full amount of the coverage. Conversely, if the insured event doesn't occur, the insurer retains all paid premiums without owing any compensation. Furthermore, when a payout is required, the exact amount the insurer owes to the insured remains uncertain, and it's unclear whether this will be more or less than the total premiums paid. Thus falling within the general prohibition of gambling found in the verse:
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   يٰۤاَيُّهَا الَّذِيۡنَ اٰمَنُوۡۤا اِنَّمَا الۡخَمۡرُ وَالۡمَيۡسِرُ وَالۡاَنۡصَابُ وَالۡاَزۡلَامُ رِجۡسٌ مِّنۡ عَمَلِ الشَّيۡطٰنِ فَاجۡتَنِبُوۡهُ لَعَلَّكُمۡ
   تُفۡلِحُوۡنَ‏
   (O you who believe! Intoxicants, gambling, idols, and drawing lots for decisions are all evil of Satan’s handiwork. So shun them so you may be successful.)  Al-Ma’idah 90
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3. Conventional insurance is a means toward the realization of Ribā (usury/interest), as it involves both Ribā al-faḍl (usury of surplus) and Ribā al-nasī’ah (usury of delay). This is because if the insurance company pays more than received to the insured, or their heirs, as in the case of life insurance, then this would entail receiving less money for more money (Ribā al-faḍl). Additionally, Ribā al-nasī’ah is realized as the insurer makes these payments in a deferred manner. If the payout by
   the insurer is equal to the amount received, then it constitutes only Ribā al-nasī’ah. Both forms of Ribā are forbidden, as per textual evidence and scholarly consensus. ¹¹

Noteworthy Important Mention:

Using the framework for impermissibility in the Shari’ah that we discussed earlier, we can now see that the default ruling entails conventional insurance being forbidden from the outset.

However, if the prohibition stems from the presence of excessive Gharar (uncertainty), and if a person is forced to take out insurance, for example someone who needs to drive in the UK and is unable to lawfully without a valid car insurance, as an exception due to the law of the land and not having a choice in the matter and no permissible alternative, insurance in this scenario would become permissible as an exception, due to the legal requirements of the country and a person not having a choice in the matter, as there are no permissible alternatives. This is supported by the rule regarding that which the Shariah makes prohibited ‘as a means’, such as the prohibition of ambiguity in contracts which is classified by Islamic Jurisprudence as 'impermissible as a means to an end' ¹² , rather than being 'inherently impermissible'. ¹³ Consequently, the criterion set by the law of the country invokes the principle of 'need', rather than 'necessity' coming into scholarly consideration by virtue of Islamic Law, and Islamic Jurisprudence permits as an exception matters that are impermissible 'as a means' but not 'as an end' due to ‘need’ being realized. ¹⁴ Should a situation arise where the aforementioned 'need' is resolved, either through a modification in legal regulations, changes in conventional insurance practices, or, more feasibly, via the introduction of a Shari’ah-compliant alternative, then the provisional allowance granted by Islamic jurisprudence would accordingly come to an end, and default ruling of prohibition will be defaulted to.

The Second View: Conventional Insurance is a permissible contract:

The foundations for their collective verdicts are encapsulated as follows:

1. The Islamic Jurisprudence Principle: “The default ruling on contracts is permissibility”. We previously mentioned “conventional insurance contracts as they exist today are a modern phenomenon from the perspective of Islamic Jurisprudence. Accordingly, scholars of this view argue that there is no specific evidence from the era of
   revelation dealing with it specifically. Therefore conventional Insurance would be permissible as it successfully falls under the principle “The origin of things is permissibility” ^{15
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2. Conventional insurance is a co-operative activity based on spreading risk across a portfolio of insured individuals and Allah says:
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   وَتَعَاوَنُواْ عَلَى ٱلۡبِرِّ وَٱلتَّقۡوَىٰۖ (And cooperate in righteousness and piety)  Al-Ma’idah 2
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   Drawing from the interpretation of this verse and the preceding arguments, the scholars of this view have concluded that conventional insurance is not only permissible, but also aligns with Allah's command for mutually assisting one another. In this context, it involves the collective sharing and distribution of risk by the insurer across the portfolio of insured individuals they have contracted with.
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3. Qiyas (deductive analogy) as follows:
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   a. ‘Aqd al-Muwālāẗ - This refers to a contract of support in which a person with an indeterminate lineage appoints a person with a known family background as a guardian. This guardian, the 'Aqilah ¹⁶ , assumes financial liabilities on behalf of the appointing party in the case of any criminal offence, including obligations like diyah (blood money) in the case of accidental homicide. Should the appointing party die or otherwise, the 'Aqilah stands to inherit from their wealth. ¹⁷ Scholars of this view draw parallels between this and conventional insurance, noting that it creates legal responsibilities of assistance between both parties. One assists the other in the event of the risk of an offence taking place, and takes a share of his wealth in return, mirroring the mutual responsibilities seen in insurance agreements.
   
   b. Ḍamān kẖaṭar al-ṭarīq - This refers to a contract of guarantee from road danger found in the books of Islamic Jurisprudence of the Hanafi Math-hab particularly. This contract involves one party assuring another by saying: “Travel this path, and should any harm befall you, I will bear the financial repercussions.”
   Drawing from this, some scholars argue by analogy that such a contract is permissible, wherein one assumes financial responsibility to safeguard another's journey. This resembles the role of an insurer who legally commits to covering financial risks specified in the policy holder’s contract.
   
   c. Al-Waʿd al-Mulzim - This refers to a binding promise which some Maliki scholars (may Allah shower His mercy upon them) have permitted. An example of this would be a person telling someone: “Sell your car, and if you make a loss I will cover it.” This is considered a binding promise and according to four mentioned scholars, if there is a loss, then the one who made the promise must cover it. Accordingly, this is used as a basis that such a binding promise creates a legal liability which has been permitted by some scholars and in turn the same would apply to conventional insurance contracts. The insurer makes a binding promise that if an individual pays his monthly installment to the insurer then the insurer will cover any loss the individual makes against due to a specified risk.
   
   d. Niẓām al-aʿwāqil - This is the framework of those who are ‘Aqilah and their responsibilities. This phenomenon entails that in instances of involuntary
   manslaughter resulting in a financial obligation like diyah (blood money), this liability is distributed among the 'Aqilah of the offender. These 'Aqilah are typically the male family members and relatives who are bāliġh (mature). ¹⁸ The aim of this system is to prevent bankruptcy from inflicting the offender, while ensuring the victim's party receives compensation, as the financial load is more manageable when dispersed. ¹⁹
   Some scholars note the resemblance between the legal responsibility shouldered by mature male family members, as per the principles of 'Aqilah, and the liability an insurer assumes when providing coverage for particular risks. They point out that just as the insurer manages a pool of insured individuals and disperses costs across this collective group, the 'Aqilah distribute the financial burden among themselves to mitigate the impact on any single member.
   
   e. Security Services Contract - This is a contract in which an individual would hire a guard for one’s premises., in order for the presence of the guard to serve as a deterrent and provide security. Some scholars argue that this is akin to an insurance contract as a person is paying for a contract to safeguard themself in the event of certain risks being realized.. ²⁰

Responses to the Evidences of those that Permit Conventional Insurance:

1. As for the first evidence which uses the principle “The default ruling on transactions is permissibility” which entails that in the absence of any evidence transferring the default ruling to impermissible, conventional insurance remains permissible; the scholars deeming conventional insurance as impermissible state that whilst the default status of matters is permissibility, barring any existing prohibition is an accepted principle, the precedent for such a prohibition does exist and is rooted in the evidence in which the Prophet (saw) prohibited transactions involving unacceptable levels of ambiguity, which would encompass conventional insurance agreements.
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2. As for the evidence which frames conventional insurance as “co-operative activity”; the scholars deeming conventional insurance as impermissible reply by stating that this is a misunderstanding of the reality of an insurance agreement. This is because the insurer is a private business that benefits from this arrangement by charging premiums that, in total, exceed the amount they expect to pay out in claims. Insurers have the business prerogative to increase premiums or even discontinue coverage for individuals to increase their profits. Policy holders prioritize their own financial interests, which include seeking the most cost-effective option. This means they may prefer changing to a cheaper insurer if it offers the same level of coverage at a lower premium. This preference for cost-saving options demonstrates that individual policyholders are concerned with their own financial well-being and not any communal entity.
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   This system isn't based on mutual cooperation or mercy among the insured individuals, rather, it's a business transaction where each party - the insured and the insurer - is acting in their own interest.
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3. Qiyās (deductive analogy):
   
   a. The response to the “‘Aqd al-Muwālāẗ” analogy: The analogy drawn here is not applicable because the nature of the contracts differs significantly. Insurance companies enter contracts with the primary objective of making a profit. This is distinct from the essence of ‘Aqd al-muwālāẗ, where the main focus is on brotherly support and mutual assistance during challenging times. In the UK, claims adjusters dedicate much of their time to scrutinizing insurance claims. Their routine involves gathering statements, examining police and hospital reports, assessing property damage, and reviewing precedents set by similar claims. However, their perspective is singularly focused. Their only objective is to reduce the insurer's expenses, striving to minimize the payout on each claim as much as possible, aligning with the financial interests of their employer.
   
   b. The response to the “Ḍamān kẖaṭar al-ṭarīq” analogy: This analogy is again not applicable for the same reason mentioned above. The intention in Ḍamān kẖaṭar al-ṭarīq is to encourage support each other through a difficulty should it arise. The party making the guarantee is not intending to do so in order to make a profit. The insurance sector in the UK frequently faces criticism for insurers resorting to technical loopholes or subtle tactics to skirt claim settlements or minimize payout amounts. ²¹ This approach stands in stark contrast to a guarantee made out of benevolence, where the intention is to genuinely assist without seeking any loopholes or reductions.
   
   c. The response to the “Al-waʿd al-Mulzim” analogy: This analogy is not precise, as the motivations behind the actions are fundamentally different. An insurer's objective is once again profit-making, whereas a binding promise stems from a desire to benefit someone else. Consider examples like offering to pay for someone's dowry in marriage or saying “Sell your broken car and I will help you with what you are less in buying another one for your family”. These are acts of kindness, motivated by benevolence, without any expectation of personal financial gain. The legal obligation assumed in these cases is born out of altruism, aiming to help one another, unlike an insurance contract where the underlying intent is financial gain.
   
   d. The response to the “Niẓām al-aʿwāqil” analogy: The idea of family and relatives coming to your aid is part of is based on the principle of maintaining bonds of kinship and Silat ar-rahim, meaning the idea of caring for kin, visiting them, and helping them in any way possible, with the intention of seeking reward and recompense from Allah. This is emphasized by the Qur’an itself:
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   وَٱتَّقُواْ ٱللَّهَ ٱلَّذِي تَسَآءَلُونَ بِهِۦ وَٱلۡأَرۡحَامَۚ
   (And be mindful of Allah—in Whose Name you appeal to one another—and ˹honour˺ family ties.) 
   An-Nisa 1
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   وَبِٱلۡوَٰلِدَيۡنِ إِحۡسَٰنٗا وَبِذِي ٱلۡقُرۡبَىٰ وَٱلۡيَتَٰمَىٰ
   (And to parents do good, and to relatives, orphans,) 
   An-Nisa 36
   
   In stark contrast, an insurance company is not connected to the insured through blood relations or a bond of brotherhood. Nor does the insurer provide assistance out of a desire to obey Allah or from a place of mercy. This is evident in the fact that the insurer requires payment upfront, before the occurrence of the event against which the insured seeks protection, as a precondition for their support when needed. This analogy is fundamentally flawed because relatives assisting family members do so without any expectation of personal gain. They don't require upfront payment for their support, offering assistance only if and when it's needed. If they were to demand advance payment as a condition for help in the future if it was required, it would also be considered a form of gambling, much like the scenario with insurance. This starkly contrasts with the nature of familial assistance, which is typically unconditional and not driven by profit motives.
   
   e. The response to the “Security Services Contract” analogy: The contract with a security company significantly differs from a conventional insurance contract, as it is essentially a contract of Ijarah, which involves hiring the services of a person or a company. In this arrangement, the security company is tasked with providing a guard whose duty is to watch over the property, effectively acting as a deterrent. The payment made in this scenario is specifically for the service of guarding, not for compensation in case of any incident. In contrast, an insurance contract operates on a different premise. Here, the payment is not for a service rendered, like guarding, as the fundamental nature of this contract is not service-based (as in Ijarah) but rather financial protection-based. If, despite the presence of security, the premises were to be broken into, the responsibility for the damages does not typically fall on the security company. Instead, they are only accountable for providing the agreed-upon guarding services.
   
   Drawing an analogy between these two types of contracts, simply because both offer a form of "peace of mind," is not accurate and goes against the framework of Jurisprudence methodology for Qiyās. In addition, even if it could successfully be argued that ‘peace of mind’ is an acceptable counter-product for this transaction, The nature of the peace of mind offered in each case is fundamentally different: one is service-based, focusing on prevention, while the other is protection-based, focusing on financial compensation after an event has occurred. This distinction makes it misleading to equate the two under the same premise of providing reassurance or security.

International Islamic Fiqh Academy’s Resolution on Conventional Insurance:

The International Islamic Fiqh Academy (IIFA) which is a universal scholarly organization recognised worldwide studied the topic of conventional insurance in the 1980s and concluded as per an almost unanimous the impermissibility of conventional insurance as a default rule. ²²

The following text is a translation from their resulting bulletin:
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International Islamic Fiqh Academy: Decision no. 9 regarding insurance and reinsurance:
To proceed, the International Islamic Fiqh Academy, as an entity of the Organization of the Islamic Conference, in its second council held in Jeddah from 10-16 of Rabī` al-Thānī 1406 AH, 22-28
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December 1985 CE, states:
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Having analyzed the proposals made by the scholars contributing to the council regarding insurance and reinsurance insurance, and having rigorously examined its various types and forms, as well the principles upon which it is founded and the goals it aims to realize, apropos other fiqh councils ' and scholarly bodies ' discussion thereto--the council has decided:

1. That the conventional insurance contract of fixed installments which conventional insurance companies deal with is a contract with copious gharar, rendering said contract void. It is thus legally impermissible (muharram shar`an).
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2. The alternative contract which adheres to Islamic principles of financial dealing and engagement is the cooperative insurance contract that is founded on donation and cooperation. Likewise is the case for second-hand insurance that is founded on cooperative insurance.
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3. To call all Islamic countries to work on the establishment of cooperative insurance organizations as well as cooperative organizations for second-hand insurance in order to free Islamic economies from manipulation and contradicting the system which Allah approves of for the ummah.

Islamic Finance Advisory’s (IFA) Resolution on conventional Insurance:

The Islamic Finance Advisory is Shura based non-profit community orientated program based in London offering a range of services dedicated to Islamic finance and Economics to an International audience.
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The Panel of Scholars at the IFA have concluded the same view as that of the International Fiqh Council, and recognizes that at a fatwa level, exceptions are applicable as per the mandates of Islamic Jurisprudence, and the IFA scholarly panel is dedicated to being a reference for the study of an individual's specific circumstances and generating the necessary Islamic guidance. ²³

A Shariah Compliant Alternative to Conventional Insurance:

Contrary to common belief, the Shari’ah is not opposed to mitigating risk, rather one of its objectives is to protect the wealth of the people. For example, it is not uncommon to request collateral when giving a loan and this is substantiated by the Qur’an itself:

وَإِن كُنتُمْ عَلَىٰ سَفَرٍ وَلَمْ تَجِدُوا كَاتِبًا فَرِهَانٌ مَّقْبُوضَةٌ

(If you are on a journey and a scribe cannot be found, then a security can be taken.) Al-Baqarah 283
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One such adaptation from the traditional form of insurance mentioned earlier emerged in the Islamic world with the development of Takaful, an insurance model adhering to the principles of Shari’ah. The concept of Takaful presents a stark contrast to conventional insurance in several key aspects, particularly in its approach to risk sharing and investment. Takaful operates on a cooperative model where participants mutually ‘guarantee’ each other against loss or damage. This fundamental difference from conventional insurance stems from the need to align financial practices with Islamic values, which emphasize mutual assistance, shared responsibility, and ethical investing without delving into transactions involving Ribā (interest), Gharar (Uncertainty), and Maysir (Gambling). These are prohibited components that we will delve into shortly.

What is Takaful?

The globally recognised and vibrant insurance market of Takaful, compliant with Islamic principles, has a rich history that dates back till before the advent of Islam. After Islam, the Messenger (pbuh) recognised this practice in a praiseworthy light captured by the following authentic narration:

Abu Mūsa al-Ash‘ari (may Allah be pleased with him) reported that the Messenger of Allah (may Allah's peace and blessings be upon him) said: "The Ash‘aris, if they ran short of provisions while on a military expedition, or if their children were short of food in Madīnah, they would gather everything they had in one piece of cloth then they would divide them evenly among themselves. Thus they are from me and I am from them." ²⁴

Takaful, which means 'shared responsibility' in Arabic, roots itself in the concept of cooperative risk-sharing. This foundational principle of Takaful highlights its long-standing tradition of mutual support and collective risk management. ^25
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‍Accordingly, Takaful is a system based on mutual assistance which originates from ancient Arab tribes as a source of pooled liability which allowed compensation to be paid for any offences committed to another tribe. This principle later extended to many fields and is present in many modern Islamic countries in the form of car and home insurance.

In terms of this article, it is notable to note that It wasn't until 1979 in Sudan that the first modern takaful company was established. Then, in 1985, the Grand Council of Islamic Scholars within the Organization of the Islamic Conference officially sanctioned takaful as an Islamically acceptable alternative to conventional insurance, given that conventional insurance practices were considered to be in conflict with the Shari’ah. Takaful is commonly referred to as Islamic insurance; this is due to the apparent similarity between the contract of kafalah (guarantee) and that of insurance. Unlike conventional insurance, members in a takaful contract are both the insurers and the insured. Each member of the takaful group agrees to make regular contributions or premiums. This takaful can be pooled into a fund and managed and distributed on behalf of the participants by an operator who acts as a mudarib – a manager or an entrepreneurial agent for the policy holders, who charges a fee to cover costs such as claims management and underwriting.

Any claims made by members are paid out of the takaful fund and any remaining surpluses, after making provisions for the likely cost of future claims and other reserves, belong to the participants in the fund—not the mudarib. Those funds may be distributed to the participants as cash dividends or otherwise.

In terms of modern implementation, a takaful operator, the mudarib, would be able to invest the pooled money and the policyholders would become joint investors in order to not diminish the value of their money over time. A positive return on policies is not legally guaranteed, as any fixed profit guarantee would be akin to receiving interest and contradict the prohibition against Ribā.

For a more comprehensive exploration of takaful, including its various applications, we plan to delve deeper into this topic in a forthcoming article inShaAllah.

^{1 https://www.statista.com/topics/4511/insurance-industry-uk/#topicOverview
2 ibid.
3 ibid.
4 KINGSTON, C. (2014). Governance and institutional change in marine insurance, 1350-1850.
5 https://www.lloyds.com/about-lloyds/history/coffee-and-commerce#:~:text=Lloyd's%20coffee%20house%20specialised%20in,their%20ship%20did%20not%20return.
6 https://www.museumoflondon.org.uk/discover/how-great-fire-london-created-insurance
7 https://www.atlas-mag.net/en/article/history-of-war-risks-insurance
8 The added phrase “from the outset” is mentioned to denote that Islamic Jurisprudence allows for exceptions to the rule of prohibitions in exceptional circumstances.
9 Dr. Issa Abdo: التأمين بين الحلِّ والحُرمة(ص: 166)1 [Insurance Between Solution And Prohibition] Professor Mustafa Al-Zarqa: نظام التأمين: حقيقته والرأي الشرعي فيه (ص: 25)1l [The insurance system: its reality and the legal opinion] Dr. Wahba al-Zuhayli:(4/442) الفقه الإسلامي وأدلته [Islamic jurisprudence and its evidence].
10 Sunan Ibn Majah 2195.
11 https://www.wahed.com/mme/is-the-riba-of-today-the-same-riba-that-was-prohibited-2
12 i.e Impermissible due to it being a means to an end which is inherently impermissible in Islamic Law.
13 For example, Ribā (usury) is considered forbidden 'in and of itself' in Islamic law, illustrating a prohibition that is inherent rather than due to being a means to something else.
14 Ibn Taymiyyah - https://www.islamweb.net/ar/library/content/22/2435/%D8%AF%D9%84%D8%A7%D8%A6%D9%84-%D8%AA%D8%AD%D8%B1%D9%8A%D9%85-%D8%A7%D9%84%D8%AD%D9%8A%D9%84?idfrom=3786&idto=3792&start=0
15 The legal maxim, الأصل في الأشياء الإباحة (Al-Asl fil-ashya’ al-ibahah), meaning “The origin of things is permissibility”
16 The word ‘Aqilah’ is the plural of ‘Aqil’, which is the one who pays blood money, or compensation in the event of an offence that carries financial consequences.
17 نظام التأمين للشيخ مصطفى الزرقا p29
18 Radd al-Muhtaar ala as-dur al-Mukhtaar, ibn Aabideen (3/345)
19 نظام التأمين للشيخ مصطفى الزرقا p60
عقد التأمين ومدى مشروعيته في الفقه الإسلامي p279 onwards
20 نظام التأمين للشيخ مصطفى الزرقا p51
21 https://www.theguardian.com/business/2022/dec/02/insurers-breaking-fca-rules-by-undervaluing-written-
off-vehicles
https://www.insurancetimes.co.uk/news/insurers-must-work-together-to-improve-consumer-trust-if-they-are-to-avoid-outside-regulation-acso/1443813.article
22 https://iifa-aifi.org/ar/1596.html
23 More on the Islamic Finance Advisory and its services can be queried here: Ifa@islamiccouncil.com
24 Bukahri and Muslim
25 https://www.pwc.com/bm/en/services/assets/takaful_growth_opportunities.pdf}