Insurance from the Shariah Perspective

In this chapter, the concept of insurance has been analysed from the perspective of Shariah. Shariah set out Quranic verses and Ahadith that support risk management. Insurance has elements of riba, maysir and gharar, which make it non-permissible from the Shariah perspective. There are two types of riba: riba al Quran and riba al Hadith. Riba al Quran is a conditional or understood increase versus a loan or debt, while riba al Hadith is excess compensation without any consideration resulting from the sale of specific goods. Both types of riba are present in insurance. Gharar has an Arabic root meaning ‘absence’ or ‘insufficient information’, which causes uncertainty. This may exist in a contract, price, subject or transaction outcome. There are degrees of gharar, and excessive gharar is prohibited. Excessive gharar leads to undue loss for one party and unjustified gain for the other, which is prohibited. Maysir also exists in insurance. In maysir, the parties involved put the ownership of their property in danger by linking it with the occurrence of an uncertain event. The outcome is always one party’s gain at the expense of the other.