DEFINITION OF INSURANCE • Insurance is a means to spread the loss caused by particulars risk, over a number of people against some amount called premium. • Insurance creates a fund under which many persons contribute a certain some of money called the premium, and out of which the persons who suffer losses are compensated.
Insurance has become a business in which the party doing the business promises to indemnify the losses against some amount, of persons who insure themselves. • Insurance can not prevent loss. • It can compensate those who suffer loss.
A contract of insurance is a contingent contract. • The general principles of the law of contract apply to a contract of insurance. • It is perfectly a valid contract. • It becomes into existence by the process of offer in the form of proposal and its acceptance by the issue of a policy.
Competent parties must make the contract of insurance. • The object of the contract must not be immoral or illegal. • It must be supported by consideration. • Briefly, it must fulfill all the essentials of a valid contract like every other contract
History of Insurance • In 3000 BC merchants in Sumer and Babylonia pooled their money to protect themselves from losses from thieves and pirates. • Greeks and Romans established benevolent societies; dues used to pay burial expenses of members who died. • Marine, life, disability, and fire insurance developed in Europe beginning in 15th century.
History of Insurance • Ben Franklin formed the Philadelphia Contributor ship for the Insurance from Losses by Fire in 1730. • Presbyterian Ministers’ Fund of Philadelphia offered life insurance to members in 1759.
Greek and German Established Benevolent Societies Funds Utilized for Meeting Burial Expense
In BC 3000 Merchants of Summer Babylonia Pool their Money to Protect From Losses, Thefts, Pirates
Time Period 15th Century 1730 1759 Presbyterian Ministers’ Fund of Philadelphia Marine, Life, Disability, & Fire Insurance Developed in Europe Ben Franklin Formed the Philadelphia Contributor ship Offered life insurance to members For the Insurance from Losses by Fire
Features • The party, which promises to pay a certain sum of money to the other party, is called the Insurer (insurance company). • The party to whom a certain some of money is paid is called the insured (policy-holder) . • The document containing the terms and conditions of the contract of insurance is called a policy.
The consideration, which the insured has to pay to the insurer for the protection given to him is called premium. • The amount for which a policy is issued is known as policy amount.
The thing or property insured is called the subject matter of insurance. • The interest of the insured in the subject matter is called his insurable interest.
Insurance Contract Between Individual Insurance Company
Contract of Purchase and Sales (1) Insured (4) Insurance Company (2) Buys Policy For subject Matter Subject Matter (5) Sells Policy to (3) By Paying Premium to Consideration
Insurance Contract Parties Subject Matter Consideration Type Insured & Insurance Company Policy Premium Akd-Awaz
Islamic View for Insurance Contract Policy Contract Payment Excess Status Can’t Become Subject Matter Over Premium RIBA Batil
Premium Payable By Insured Status As per Islamic Sharia DEBT to Insurance Company
SIZE: Premium and Sum Insured Sum Insured Premium Amount Protection to Insured Small Amount Large Amount Premium is 3 to 4% of sum insured in case of General Insurance
Insurance Means to spread the loss caused by particulars risk over a number of people against Some amount called Premium Large Amount Small Amount
Insurance Company Creates Pool of Fund Participants Premium Participants Premium Participants Premium Participants Premium Status of Fund not a Legal Body
Contract of Insurance Between Not between Insured and Insurer Members of the Pool
Status Company Fund of Participants Part of Insurance Company Legal Body Not a Legal Body
Participant And Company Participant And Company Insurance Contract Between Participant And Company Participant And Company
Participant Participant No Contract among Participant Participant All Participants have separate Contract Only with the Company. Between Participants there is no Contract
Contract Between Type Insured Insurer Commutative Akd-e- Awaz View : Conventional Experts
Parties to the Insurance Contract Insurer (Insurance Company) Insured (Individual) Transfers Risk Buys Risk
Requirement of Insurable Risk Loss must not Deliberately Be made Loss must be determinable and measurable Large Number Of Exposure Units Loss must be calculable Premium shall be economically reasonable Loss shall not be Catastrophic
Does not apply On Life Insurance Principle Of Indemnity The first purpose is to prevent the insured from profiting from insurance The second purpose is to reduce moral hazard Insured should be restored to approximately the same financial position that existed prior to the loss.
Type of Insurance General Third Party Life EXAMPLE EXAMPLE
Insurance General Life Insurer Insured Insurer Insured Full Claim Payment is Certain Full Premium Payment is not Certain Full Premium Payment Even Part Claims Payment is not Certain Element of Gharar presents
Insurance Contract Sum Insured Premium Larger than Premium Smaller than Sum Insured Toyota Corolla Sum Insured 1,000,000. Premium Yearly 40,000
GENERAL INSURANCE General Insurance Contract for Motor Vehicle Premium decides 40,000 and Insured Amount 1,000,000 Loss amount 400,000 No Loss To Car Loss Up to 23,000 Rs. 360,000 Enjoyed by Insured Rs. 40,000 totally enjoyed by Insurance Company Rs. 17,000 only enjoyed by Insurance Company
LIFE INSURANCE Life Insurance Contract Premium decides Rs. 36,000 per year For 10 years. Payment to Insured by Insurance Company with Interest Rs. 600,000 Contract Total Premium is Rs. 360,000 Interest thereon Rs. 240,000 Insured paid Rs. 324,000 in 9 years Insured alive & paid 360,000 in 10 Years Insured death & paid 36,000 Rs. 564,000 Excess Received by Insured Rs. 276,000 Excess Received by Insured Rs. 240,000 Excess Received by Insured
Contract of Insurance Between Not between Insured and Insurer Members of the Pool
Termination of Insurance- LIFE Insurance When Insurer does not pay if insured alive at maturity or terminates the contract When Insurer does pay if insured alive at maturity or terminates the contract Premium reasonably small in size Premium reasonably large in size Example: Normal Policy Examples: Credit Cards, Loans Payment to Instant man
Legislation Supporting to Prime Law Prime Law Ministry of Finance Insurance Rules 2002 Insurance Ordinance 2000 SECP Expert recommended that there should be unity of direction Both Ministry of Finance & SECP have tassel as both of them have made Insurance Rules 2002
Insurance Practice aspect Conceptual aspect It is a good Concept Further does not Violate Sharia Violate Sharia Principles
Al-Maidah verse # 2: Conceptual Aspect "Help ye one another in righteousness and piety, but help ye not one another in sin and rancor". Principles of Muwalat, Maaqil, and Kafalah and establishment of Islamic welfare state by the Holy Prophet (SAW), Waqf and Tabrru are examples for recognition of this concept.
Practical Aspect Violation Sharia Principles Maisir Riba Based Gharar Sale of Debt vs Debt
Fatawas Against Insurance
Declaration by Shariah scholars rendering conventional insurance un-Islamic • Fatwa issued in Judicial Conference held in Makkah in Shaban 1398 AH. • Verdict of Supreme Court of Egypt on Dec. 27, 1926. • Unanimous resolutions and fatwa by Ulama in the Muslim League Conference in Cairo in 1965. • Unanimous decision by Muslim Scholars in seminar held in Morocco on May 6, 1972.
Judicial Opinions and Fatwas confirming validity of Takaful • Fatwa issued by Higher Council of Saudi Arabia in 1397 AH. • Fatwa Issued by the Fiqh Council of Muslim World League in 1398 AH. • Fatwa issued by the Fiqh Council of the OIC in 1405 AH. • Approval of the Grand Counsel of Islamic scholars in Makkah, Maja Al – Fiqh, in 1985.
Definition of Takaful Takaful is an Arabic word that means "guaranteeing each other".
Takaful is based on Tabarru (Voluntarily) TA-AWUN (mutual assistance)
OBJECTIVES OF TAKAFUL
(1) It is one of the means of providing a material safeguard for offspring and is thus in line with the saying of the holy prophet SAW. He (SAW) spoke to this effect: • "It is better for you to leave your off-springs wealthy than to leave them poor, asking others for help" [Narrated by Saad b. Abi Waqqas (r.a).
HADITH OF HOLY PROPHET (PBUH) Explicitly mentioned Impliedly mentioned To leave off-springs Wealthy Not to leave off-springs Poor • [Narrated by Saad b. Abi Waqqas (r.a).