Question # 416: I live in Canada. I have a lot of debt to pay. I was jobless but just got a job at an insurance company finally. Someone told me it is not halal to work in bank or insurance company. Can you please help?
bismi-llahi r-raḥmani r-raḥīm,
Assalamu ‘laikum warahmatullahi wabarakatuh,
All praise and thanks are due to Allah (سبحانه و تعالى), and peace and blessings be upon His Messenger (صلى الله عليه و سلم).
First of all, we implore Allah (سبحانه و تعالى) to help us serve His cause and render our work for His sake.
Shorter Answer: The fact that there is a dispensation for Muslims in the west to have insurance as long as they are desperate for it does not necessarily mean the permissibility of working in this industry. The fatawa of the majority of contemporary scholars is that all kinds of commercial insurance are forbidden, due to a number of reasons including the following:
- It includes a transaction involved in a usurious interest because a person pays an amount of money which will be returned to him either less or more. This is a form of usury (riba).
- It includes gharar (uncertainty) selling of a known service for unknown price.
- It is like taking risk by payment to get a service which may be secured or not based on the future fortunes. This is a form of gambling (maysir).
Hence, the basic principle is that working with commercial insurance companies is not permissible; however, only in case of dire necessity, some auxiliary jobs (such as working in IT department or security guard, which are not regarded a direct engagement in the insurance transactions) may be taken up, but only up to the point where one cannot find a job to provide for his livelihood.
On the other hand, working with social insurance (not intended for profit, but rather to provide social protection or health coverage to recipients) is permissible provided it is not accompanied by any illegitimate activities (such as interest-based investments). Lastly, Islamic insurance (takaful) is permissible, as long as one abides by the remaining Islamic restrictions in terms of investing insurance funds.
Long Answer: The fact that there is a dispensation for Muslims in the west to have insurance as long as they are desperate for it does not necessarily mean the permissibility of working in this industry. Working in any job related to commercial insurance is prohibited by default, as the core business itself is Haram. Meanwhile, working in this industry is less prohibited than working in the conventional banking and finance industry at large. The reason behind this differentiation is the level of involvement of riba in these two industries. It is obvious- at least for people of knowledge- that riba is not as explicit in the commercial insurance, except for the life insurance one, as it is in the financial industry. (Dr. Main Khalid Al-Qudah, Member of the Fatwa Committee of Assembly of Muslim Jurists in America) The Fataawa of the Islamic Fiqh council and the Fataawa of the majority of contemporary scholars is that all kinds of commercial insurance are forbidden as they are based on undefined contracts, gambling, usury and interest and taking people’s money without right. Therefore, it is forbidden to work in such companies… (Islamweb.net, a web site belonging to the Ministry of Awqaf and Islamic Affairs in the State of Qatar)
The following is the fatwa from the ‘Fatwa Committee of Assembly of Muslim Jurists in America’ in this regard:
IV: Working for insurance companies
- Insurance is one of the afflictions of the age on which modern fatwa scholars have already spoken, whether in their role as individual scholars or on the level of official fatwa councils and assemblies. There are many difference types of insurance; some of which are permissible and some of which are prohibited, while some are subject to scholarly differences of opinion (ijtihad). The ruling on working for insurance companies varies according to the judgment on the insurance policy itself. Whichever of these contracts is valid, it would be permissible to work for their institutions and whichever contracts are invalid, it would not be permissible to work for them or to assist them with said contracts.
- The basic principle regarding insurance is that it is a system based on providing a helpful service, solidarity (mutual responsibility), and charitable assistance. With this meaning and in this context, it is one of the essential Islamic values, when it is restricted in its organization and contracts, as well as the investment of its funds, to the rules of Shari`ah. In fact, it would not be an exaggeration to say that providing it in this context and in light of recent developments has become a general communal obligation (fard kifayah).
- Systems of insurance and their contracts in this day and age fall into three basic categories: commercial insurance contracts and social or mutual insurance contracts, each being subject to its own verdict.
- The basic principle regarding commercial insurance contracts, regulated by commercial insurance laws and practiced by commercial insurance providers (such that the company is a real partner in the contract and is obliged to pay should the damage insured against actually occur, in return for fixed premiums paid by the insured throughout the period of insurance), is that it is an invalid contract due to the presence of uncertainty (gharar), unknown elements (jahalah) and other causes of invalidity. The basic principle is that no commercial insurance is permissible, except when required by law or resorted to under conditions of general necessity (hajat `ammah) when this takes the place of exigent need (daroorah). Working in the field of marketing these contracts or providing any assistance for them is not permissible, except in cases of exigent need or general necessity when it takes its place. Whoever is forced by need to resort to work in this field must also have the intention to leave this line of work as soon as he is able to do so.
- Then there is social insurance, which is not intended for profit, but rather is meant to provide social protection or health coverage to recipients. It is—usually—arranged by governments or public companies and institutions by deducting a portion of the employee’s salary, either with a contribution from the insured or without, over the course of his employment. This is legitimate in Shari`ah and, as such, it is permissible to accept it and to work for institutions involved in it, whether by establishing it or by marketing it, because it is essentially based on a legitimate concept. This must be accompanied by avoidance of any illegitimate activities involved in its application, such as interest-based investments and the like.
- Islamic insurance (which resembles mutual or cooperative insurance in many of its characteristics) is based on charitable donations, cooperation and mutual benefit. The role of the company is merely that of agent (managing the insurance process) and entrepreneur (financing the funds). This is a legitimate contract and, as such, it is permissible to use it and to work for any of its institutions, as long as one abides by the remaining Islamic restrictions in terms of investing insurance funds.
The following is an excerpt from the Study Material for the ‘Insurance Banking and Insurance’ Course offered by ‘Institute of Islamic Banking and Insurance’, London, UK:
Elements of Gharar, Maysir and Riba in Commercial Insurance Contracts
As a single contract, insurance violates riba and gharar rules. One party pays cash premiums in return for the promise of the other party to pay a cash sum on the occurrence of a contingent future event. So viewed, it also resembles a bet (maysir). Moreover, most insurance companies invest their premiums in interest-bearing investments forbidden by the Shari’ah.
A contract must be free from excessive gharar or uncertainty. A major source of gharar is lack of knowledge or absence of adequate and accurate information. In the insurance context, gharar refers to unexpected loss, risk, hazard and unknown danger. At the time of contracting, the insurer does not know whether it will ever be called upon to pay claims under the policy, nor the size of such claims, if any. Similarly, the insured pays a premium (price) but does not know if any financial benefit will be received in future, nor the size of such benefit. If terms of a contract are uncertain, unclear or one-sided at the expense or detriment of the other party to the contract) then it is unacceptable from a Shari’ah perspective.
In conventional insurance, …the one-sided nature of conventional insurance contract is in favor of the insurer. The policyholder loses his or her rights over premium for a promise of benefits payable under certain circumstances in future. The conventional insurance company owns the premium and any profit from such transactions in the first instance accrues to the company. It is up to the company directors to distribute part of these profits (or surplus as the case may be) back to the policyholders.
An element of gharar exists in any insurance contract and to a certain extent could be tolerated in a takaful (Islamic) contract (as gharar-e-yasir where gharar is greatly minimized and, therefore, acceptable from the Shari’ah standard)… However, to ensure that uncertainty does not disqualify an insurance contract, it is necessary that:
- The insurance cover is a genuine and essential need.
- The interests of the insured can only be safeguarded through effecting insurance and in no other way.
- The insurance is transacted on a co-operative basis.
The concept of co-operative principles is clearly explained in the takaful contract wording under which ownership of the premium is not with the insurance company. Instead it is jointly owned by participants who pay these premiums (as their contributions) to a takaful pool (the takaful fund). Returns from the pool are either the benefits payable under certain circumstances or as share of profits (or surplus) in proportion to individual’s contribution. The participants’ entitlement to share in takaful profits is balanced by the possibilities of sharing any losses in the pool. This is essential in order to minimize gharar (the lop-sided condition favoring one party at
the expense of other). Nevertheless, the loss sharing aspect is a last resort after other methods have been exhausted such as recourse to reserves and access to interest free loan from shareholders (called qard hasan) to correct the deficit. The last resort situation is in the shape of increase in price for future coverage rather than retrospective recovery for past losses.
Gambling (maysir or qimar) is clearly forbidden under the Shari’ah. As far as insurance for profit-making is concerned, it is argued that the insurer effectively “bets” that the contingencies insured against will not occur. The fact that such “betting” is done scientifically with the use of statistical tables and probability distributions does not alter the situation… [Nevertheless,] Conventional insurance seeks to draw a line of distinction between gambling and insurance with the requirement of “insurable interest”. This implies that the beneficiary in insurance (with the exception of life insurance), must have an insurable interest in the subject matter, or at least an expectation of acquiring such interest. While this avoids the possibility of using insurance as a device for gambling in the conventional sense, the scope of maysir (and qimar) in Shari’ah is much broader and includes any form of unjust enrichment of one party at the cost of another. The issue of unjust enrichment is very significant when the insurance business is organized as a stock corporation.
The stockholders gain by maximizing the insurance surplus. The problem is considerably reduced in a mutual insurance company where policyholders themselves own the organization. There is, however, still a possibility of unjust enrichment within the group of policyholders, which needs to be carefully avoided or minimized. Thus, the prime difference between gambling and insurance is the context of excess uncertainty and gains attached to it.
…The main reason of prohibition of gambling and conventional insurance is the sale of gharar that lead to maysir (gambling), which leads to oppression and is therefore prohibited in Islam. In fact, Islamic insurance is a mean of eliminating pure risks. The term pure risks are distinct from speculative risk. The normal business risk is pure risk, which are part of Islamic insurance. For example, risk of fire explosion is a pure risk. However, speculative risk, which depicts the prospects the loss or gain, do not encompass by Islamic Insurance.
…Islamic scholars maintained that due to gharar (uncertainty of terms), an element of maysir existed. This was related to the fact that a small amount of premium secured a large amount of sum insured, only payable if certain event took place. If it didn’t, the contributor lost the premium. On the other hand, the Insurance Company stood to lose out if total claims exceeded total premiums. It was also maintained that, in case of life assurance, upon happening of the event, the insured (or his or her beneficiaries) did not know how this amount of sum insured was generated from a small premium paid.
These areas are taken care of through the co-operative principles of Islamic insurance. Under this, the “large amount in proportion to the premium paid” comes out of a fund that is collectively owned by the participants. They had agreed at the time of joining, to give up their individual rights to help each other at the time of need (the insured peril). Alternatively, they do not lose out if the insured peril did not occur within the agreed time period, as they are rewarded for their willingness to help each other through the mechanism of profit sharing.
Riba which is prohibited in the Shari’ah refers to transactions involving unequal exchange of the same thing and also refers to income derived from interest gained from investment and lending. In conventional insurance, the money paid in premiums is never equals to the money received in compensation. “The insured received less or nothing, as the case may be, in exchange of the premium when (1) he removes the policy, (2) fail to pay on premiums, (3) does not experience peril deserving compensation. Furthermore, received payment against the insurance may be far greater than premium, if a hazard strikes. So riba accrues to the insured if the compensation is more than the premiums, and so to the insurance when compensation falls short of premium. As a result, insurance contract, interpreted as exchange of money, cannot be free from riba. Another reason that the insurance premium is invested by insurer in interest-bearing securities”.
When the insurance contract is seen as sarf (that is sale of monetary value for monetary value), the difference between the premium paid and the sum insured cannot but be described as riba as insured may receive a sum exceeding by far the instalments that he paid.
An insurance agreement in which the policyholder expects to receive a predetermined amount that is greater than that invested thus clearly contravenes the prohibition of riba. The problem of riba could, however, be avoided where the contract provides for profit shares rather than fixed interest. In conventional insurance, the whole amount of premium received by the conventional insurance company is invested in the interest-based investments and activities and the money paid to the client is therefore derived from riba-based activities. While the act of investment in riba-based avenues by the insurer does not affect the contract of insurance per se, the nature of investment in takaful needs to be Shari’ah compliant.
According to Shari’ah scholars, any conventional insurance premium entails riba because for a small premium one can get back a large sum should a risk occur. The scholars argue that the objection may be overridden when the service of insurance is offered on donation basis through cooperatives, because by giving the premium as a donation, it does not involve riba because donations are not exchange contracts, and such donations are given to a cooperative whose system is to cover these risks even with the fact that you really know this coverage in advance and you give the donation with the condition that such a coverage exists.
The application of riba principle, however, does not mean that capital is costless. Islam permits making a predetermined claim on the surplus from using capital for production. Therefore, a profit-sharing arrangement where the profit-sharing ratio is predetermined, not the rate of return, is allowed in Islam. The Shari’ah also permits shareholding as Islam encourages movements of capital for the benefit of individuals and society as a whole.
Allahu A’lam (Allah (سبحانه و تعالى) knows best) and all Perfections belong to Allah, and all mistakes belong to me alone. May Allah (سبحانه و تعالى) forgive me, Ameen.