Takaful - Prohibited Elements in the Stock Company Insurance Model

• The stock company model of conventional insurance is one of the most common insurance models in the market.
• From a Shari’ah perspective, this model may contain several prohibited elements.
• The three main prohibited elements are:
• Riba – interest
• Gharar – excessive uncertainty
• Maysir – gambling or gambling-like gain and loss

1. Riba – Interest

• Conventional insurance companies may invest premium funds and shareholder funds in interest-bearing investments.
• Examples include:
• Conventional bonds
• Interest-bearing deposits
• Other interest-based financial instruments
• The interest earned from these investments creates a riba issue.

Simple Example

Premiums collected → Invested in conventional bonds → Interest earned → Riba

2. Gharar – Excessive Uncertainty

• The conventional insurance contract contains uncertainty because the policyholder pays a known premium but does not know:
• Whether a claim will occur
• When a claim will occur
• How much compensation may eventually be received
• The insurer also does not know with certainty how much it will eventually have to pay.

Example

• Ahmad pays RM1,000 for insurance.
• He may receive:
• RM0 if no insured event occurs, or
• A large amount of compensation if a covered loss occurs.

Simple Idea

Premium is known → Claim is uncertain → Gharar

3. Maysir – Gambling-Like Outcome

• Maysir is closely connected to gharar in conventional insurance.
• The uncertainty in the insurance contract may result in a gambling-like financial outcome.
• The amount gained or lost depends on whether an uncertain event occurs.

Example

Ahmad pays RM1,000.

• If no accident occurs:
• Ahmad receives no claim payment.
• If a major accident occurs shortly afterward:
• Ahmad may receive RM100,000.
• Therefore, the financial outcome depends heavily on the occurrence of an uncertain event.

Simple Relationship

Gharar

→ Uncertainty about whether a claim will occur

→ Creates an uncertain financial outcome

→ May give rise to Maysir

Therefore:

Gharar ≠ Maysir

but

Gharar and Maysir are closely interconnected.

Why This Is Relevant to the Stock Insurance Company

• In a stock insurance company:
• Policyholders pay premiums.
• The insurer accepts the insured risks.
• The insurer undertakes to pay compensation if covered events occur.
• Shareholders own the insurance company and expect profits.
• The conventional structure can therefore involve:
• Gharar in the contractual exchange
• Maysir arising from the uncertain gain or loss
• Riba arising from interest-based investments

Easy Way to Remember

Riba → Problem with interest

Gharar → Problem with excessive uncertainty

Maysir → Problem with gambling-like gain or loss

Simple Formula

Conventional Stock Insurance Model → Riba + Gharar + Maysir → Shari’ah concerns