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Why conventional insurance is prohibited (Haram)?

The commercial conventional insurance contract is prohibited (haram) according to theShariah because of the following reasons:

[a] Gharar ‘ Gharar’ is taken from Arabic word which means uncertainty. According to scholars,‘gharar’ is defined as a contract where the results are not known or hidden or one of thepossibilities where the frequent occurrence is the one that is more feared. Theconventional insurance contract is a contract of exchange whereby the insured pays theprice (premium) and the insurer provides compensation. In a contract of exchange, the‘gharar’ element that can nullify the validity of the sale is consent. The Quran sayswhich means

" O who you believe, do not eat property amongst you in a false way, except throughtrade by mutual consent." (An-Nisa’:29)

However, the subject matter in a contract is required in determining consent because itis not logical to say that one gives consent to something that he does not know. Thereare four types of ‘gharar’ which are clarified by our scholars. These are:

i. Gharar in the outcomeWhen the contract is made, neither the insurer nor the insured knows the outcome of the contract. The insured does not clearly know whether he will get compensation or not

as an exchange to the premium that he has paid. Similarly, the insurer does not knowthe outcome.

ii. Gharar in the existenceIn the conventional insurance contract the insured does not know the existence(quantum) of the compensation since it depends on the outcome that may or may nothappen.

iii. Gharar in the results of the exchangeWhen the contract is made, neither the insurer nor the insured knows the outcome of

the exchange. The insured does not know whether they will receive the compensation inexchange for the premium that they pay. Similarly, the insurer does not know how muchpremium they will receive. Sometimes the insurer receives the premium only once or afew times, but has to indemnify an amount that is not commensurate with the premium.

iv. Gharar in the contract period

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According to some scholars, when a contract is deferred, the period must be madeknown. If not the contract is considered void. The same situation arises in theconventional insurance contract whereby compensation is based on a time frame that isnot known.

[b] Maisir ‘ Maisir’ is also taken from Arabic word which means gambling. The conventionalinsurance contract is equated with gambling where if the peril (risk) occurs, the insurer will lose. On the other hand if the peril does not occur, the insured will lose. Furthermoresome scholars argue that the source of the money that is being paid as compensation isnot determined.

[c] Riba‘ Riba’ is taken from Arabic word which means interest. There are many verses that

prohibit ‘riba’. What exactly constitutes ‘riba’ has always been a disagreement amongscholars. Some scholars are of the opinion that interest whether on principal or latepayment is ‘riba’. Other forms of ‘riba’ established by the sunnah of the Prophet is theexchange of ‘ribawi’ elements where there is a difference in time and/or quantity. The‘ribawi’ elements mentioned by the Prophet are gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt. Rightly or wrongly, by makingan analogy, money is similar to gold and silver where it is a medium of exchange.Therefore it is a ‘ribawi’ element and that in the contract of exchange between theinsurer and the insured there is difference both in quantity and amount. Furthermore,these scholars argued that conventional insurance companies give out loans from the

premiums received and charge interest and no doubt that this is ‘riba’.