Monday, December 1, 2008

Is Riba (usury) Inherent in the Insurance Business?

Is Riba (usury) Inherent in the Insurance Business?

The question that should first be addressed is whether riba is central to the insurance business or if it is only incidental. Some Scholars are of the opinion that the insurance business itself is riba. The following quotation indicates that some Scholars are convinced that the insurance business itself is riba:

Present insurance not in line with Islam

The practice of insurance presently follows the western style of management and is therefore not in line with the teachings of Islam in a number of ways:

1.

Many insurance contracts contain usury, as they promise to pay more than the premium paid.
2.

Insurance companies invest the premiums which they have collected, in interest bearing investments;

It would appear that the insurance business is regarded as riba because the insured is promised a sum of money far in excess of that which he has paid as premium. Some insurance practitioners, on the other hand, may not agree with this argument as the money paid as premium should not be regarded as a loan to the insurance company. And neither should the payment of the claim be considered as repayment of the loan with an incremental amount. The issue of loan is a key factor because the prohibition of interest according to the Qur'an specifically refers to the charging of interest on loans. This view is shared by Muhammad Nejatullah Siddiqi in his book:

"This opinion is based on the assumption that every such incremental payment is interest. This is a baseless assumption as the Shariah does not regard absolutely every increment as interest. Money paid as premium is not in the nature of a loan, and the payment of a claim does not amount to returning the loan with an incremental amount that may be considered interest. In the true spirit of it, a premium payment is a kind of co-operative contribution towards the availability of a useful social service. This spirit is manifest in mutual insurance and in state-controlled insurance. Even in the case of private insurance we cannot rightly call a premium a 'loan'. It must be considered rather as a price of a service to be rendered if and when needed.

However, we must bear in mind that there is another dimension to riba and that is the exchange of ribawi items. These Scholars could have a point as money is being exchanged for money. Not only is there an increment in terms of quantity (i.e. riba fadhl) but there is a time factor involves i.e. riba nasiah.

Another issue to be addressed is the fact that present day insurance companies also indulge in various activities which involve the element of riba. For example, Insurance companies:

1. Invest in interest bearing instruments;

2. Pay interest on some of their products;

3. Consider future interests when calculating their premium rates.


The above riba related activities, although against the teaching of Islam (except for 3 above), are considered by some as only incidental to the main business. For example, using the interest factor in the calculation of the premium is not the same as charging interest. It is just a factor used to keep the premium as low as possible, by taking into consideration a cautious estimate of future profits if the capital is utilised productively. In an interest-free environment, this issue does not arise at all. Moreover, the premium charged during the period of insurance is fixed. It does not vary like the interest rates on loans, which are dependent on the Base Lending Rate (BLR).

The question is: if participating in such activities is only incidental, would it render the whole business haram? For example, some property developers do invest in interest bearing instruments and may even use the interest factor in pricing their products but we do not hear of such businesses being judged haram on the grounds of riba. This is because riba is not their core business, unlike the conventional banks, for example. Moreover, such incidental activities could easily be removed from the insurance system by getting the insurance companies to invest in various Islamic financial instruments which are widely available in Malaysia. In doing so, the investment aspects of the insurance business would be more shariah- compliant.

Questions to ponder regarding riba:

1.

Is it riba nasiah when the amount promised to be paid as claim is more than the premium collected?
2.

Although the claim promised to the insured is usually more than the premium on an individual basis, as a group (within a common fund) the amount paid and collected should be about the same (ignoring expenses and profits for the moment). Do you agree with this statement?
3.

Would the position alter if the premium is treated as contribution towards a common fund for mutual help rather than for purchase of cover?
4.

Assuming everything else remains the same, would the operation of a conventional insurance company be regarded as shariah- compliant, if it invests all its funds in non-interest bearing instruments and does not pay interest on its products?

No comments: