Difference Between Takaful and Conventional Insurance
As a concept, insurance actually does not contradict the teachings of Islam as it is a method by way common resources are pooled in order to help the needy. Based on this, it is said that the operation of insurance as known today was established on the practice of blood money under the Arab tribal custom which formed the basis of modern-day mutual insurance. In Asia, the practice of insurance was first established in the early second century of Islamic era when Muslim Arabs began to expand their trade to India, Malay Archipelago and other Asian countries. Because of the long distance, the voyage was hazardous and the traders often had to incur losses arising from a multitute of misfortunes.
In the modern economic environment insurance is a necessity, not only for individuals to protect their dependents and loved ones but also to institutions to protect their assets and other liabilities. Without insurance one has to shoulder the financial liability fully should a catastrophe or misfortune occur, and certainly this would pose a heavy burden to the individual concerned and his family. The requirement of insurance therefore is not only the purpose of creating and enhancing savings but also the need to comply with the legal requirements of which motor insurance is a good example. As a matter fact, insurance is usually one of the precedent conditions before a loan or financing is disbursed by any financial institution. Thus insurance is not a service or facility at the pleasure for the affluence only. As a necessity in modern-day living insurance has become part of life.
In view that the present-day practice of insurance is not in conformity with the requirements of Syariah, Muslim scholars had to look into an alternative system which would conform with such requirements. According to the scholars, the business of insurance is based on a buy-and-sell contract which however does not fulfill the characteristics of a buy-and-sell contract according to Islam. Such buy-and-sell contract essentially has three characteristics, namely parties to the contract (Aaqid), subject matter to the contract (Ma’aqud Alaih) and offer and acceptance (Sighah). In particular, the scholars examined the subject matter of the contract which they concluded as a buying-and-selling transaction the operation contains unknown and uncertain factors. The uncertainty of the subject matter would result to the presence of the element of `gharar’ (unknown or uncertain factors in the operation of a contract). The presence of gharar would make the contract void.
Gharar is presence in a buying-and-selling operation when sale or purchase of goods or services which are non-existence; sale or purchase of goods or services which are in existence but cannot be delivered to the buyer but its form, value and timing of delivery cannot be determined and known at the time when the contract was made. In the case of an insurance policy, the insured company guarantees to pay a certain sum of compensation in the event of a catastrophe or disaster, but the policyholder in the first place does not know, for example of when such catastrophe or disaster is to occur as well as the amount of the compensation that the company will pay him. Nor would he have any knowledge the source of the compensation.
The scholars further viewed that as a consequence of obtaining compensation or proceeds from a financial transaction which contains the element of gharar would lead to the practice of `maisir’ or gambling. Indeed the whole business is said to have semblance of gambling as profit or loss would very much depend on `chance'.
In this regard, the operation of an insurance system acceptable to the rules and practices of Syariah must not be based on buy-and-sell contract. The subject matter of the contract under this system must be definite, clear and transparent so that it is known to all parties of the contract. The obligations and responsibilities under the contract are clearly known to both parties. In addition, a buy-and-sell contract which is lopsided in favour of one party at the expense of the other contracting party is viewed as gharar too. A financial contract in which one party has to forfeit his capital or contribution in the event of cancellation prior to the maturity or expiry of the contract resulting in the loss of the capital, as in the example of no refund of premium when a policyholder surrenders his insurance policy would be considered as gharar. The system of Islamic insurance would therefore contain the element of shared responsibility enabling the spreading and sharing of profits or losses among a group of members through a defined fund jointly established by them in line with the pronouncement of the holy Quran, “Help ye one another in righteousness and piety, But help ye not one another in sin and rancor: Fear God: for God is strict in punishment (Al-Maidah-verse 2).