Sep 28, 2007

To Insure or not To Insure?


The topic, you may wonder why I have put like that? I got inspired by the topic in a community where I was having discussion. Once a student asked the question.
"Which pencil to use? 2B or not 2B?"
Let us come to the topic. To insure or not to insure? Let me begin with an example given by one of the members of that community.
He was playing like a child on the footpath and jumped over the bars and hedges just for fun (People dont forget their childhood even in their maturity [:P]). And lost his mobile phone while playing. now he was very sad, he lost his costly mobile phone. But since it was insured he got a replacement mobile within a day and was much relieved (You know how people feel without their mobile even for a minute).
So see how nice the insurance policy is. We get the things replaced if it is insured. Isn't it nice? Isn't making an insurance help us from not being worried about the loss?

On the face of it, YES. But if you look into the technical details with the light of Islam you will come to know how harmful it is and why it should not be used.

Ok let me begin with this. Whatever profit you get from Insurance, the basic harm of it is, the Trust in Allah will fade away. We trust in Allah that He is the only one who gives us loss and profit and no one else can harm us if He does not will us to harm and no one can save us if He wills us to put into trouble. One should know that just like all good things, all bad things also come from Allah (alone) and when Allah puts you in trouble then it is only Him who can pull you out of it.
(Qur'an 6:17) Should Allah touch you with affliction, there is none to remove it but He; and should He touch you with good, He has the power to do everything.
So now the question comes if u trust in Allah then you should be least bothered about your belongings. Let me clear you the concept of it by quoting a Hadeeth of our Prothet.
“One day Prophet Muhammad (SAW), noticed a Bedouin leaving his camel without tying it and he asked the Bedouin,“Why don't you tie down your camel?” The Bedouin answered, “I put my trust in Allah.” The Prophet then said, “Tie your camel first, and then put your trust in Allah.” (Tirmithi)

So from this we come to know that we should take care of our security measures and then put all our trust in Allah. We should lock the keys of our house doors properly and then put our trust in Allah. Now one may ask isn't the Insurance policy also a kind of Security? For this I would like to give the replies given by one of the members of that community. It covers the technicality of the insurance as well. Please be patient and read completely as it is long a reply.

Tawakkul vs. Buying security (through Insurance)
The best way to highlight the difference between these two is the camel example.

Prophet Muhammad (SAW) asked us to tie the camel first. That’s basic common sense, as all of us are concerned about our property. And we cannot blame Allah for our own stupidity. This is why we also lock our house at night. This is also why we install a security system in our cars. So Tawakkul comes AFTER we have exercised our free will and done the best we could to protect our property, for which we have been given some solid advice by Nabi (SAW).

Stepping into the deserts of Arabia for one moment, imagine that you tied your camel to the corral and then went into a mosque to pray. Someone stole the camel. Obviously, you did the best you could, but ended up losing the camel anyway (very precious resource in a desert). This is where Tawakkul comes in. All good things and all bad things come from Allah.

Now, the same analogy can be used to explain the security guard outside your door. Or the padlock on your main door. If someone holds the guard at gunpoint and robs you blind, will you then hold the guard at gunpoint and ask him to make good the loss? Of course not! Because it is not the poor security guard's fault, neither is he under any obligation to pay you back. So what do you do, despite the fact that you have been paying wages to the man, you accept this tough time from Allah and do Tawakkul. The security guard example, thus, cannot be used to justify insurance because the security guard does not indemnify you.

Now let’s look at insurance. The insurance company asks us to pay a premium and provided that all our premiums are paid in time and in full, they will make good the loss (indemnify). Step into the Arabian desert again (Just hypothetically ok, don't go into the desert and think). You have lost your camel, but the animal was insured. So you go to the insurance company and tell them that someone stole your camel. Do they pay you? NO! They ask the same common sensical question: Did you tie your camel?

So now, once you have proven that you did tie your camel they will pay you. If you are unable to prove that, your premiums will be lost as your claim will not be paid out . So now the scenario is that Allah sent trouble your way, and it seems that the insurance company bailed you out. The Tawakkul concept is killed right here, which is a basic tenet of our faith in Allah.

Having said that, let’s look at how the insurance company makes money. Open up any book on financial institutions and read about insurance companies. You will discover that the insurance companies make money through this equation:
Premiums Received – Claims paid out = Surplus (profit)
So the insurance game is all about getting more in premiums and paying out LESS, otherwise the company will be in a loss. This is why insurance companies design their contracts in such a way that getting the claim becomes really difficult. Here are some examples:
  1. Pay all your premiums on time and you get a 10% discount.
  2. If you miss your premium payment, your claim will not be paid out.
  3. If you are 25 and healthy as a horse, your premium payments will be LOWER.
  4. If you are 55 and have had a heart attack in the past, your premiums will be higher.
  5. If you are suffering from Hepatitis C, your premiums will be higher
  6. If you miss out on the premiums on your car insurance, your discount offer will be taken back.
  7. If there is a theft in your house, and the lock on your door wasn’t working properly, then your claim will not be paid out.
The next thing that makes the insurance business forbidden is that the insurance company HAS to invest in financial instruments that will give a guaranteed return. This is because it needs to predict its inflows if it is to settle claims in a year. Insurance companies keep these complex actuarial tables which give the probability of an event. How many people will have heart attacks, how many will die, how many cars and mobiles will be stolen etc. Based on these, they work out how many claims will be made or how many policies will mature over time. The better an insurance company is in making this calculation, the more prepared it is for any eventualities. But when things like Hurricane Katrina, 9/11 and Sheffield floods happen, they refuse to pay out finding a convenient clause that says they don’t cover terrorism or Acts of Nature. What a laugh!! (By the way, some insurance companies now offer protection against terrorism as well but the clauses are even more strict).

By nature then, the insurance business needs predictability. This is why insurance companies are the biggest institutional investors in fixed rate bonds, long-term saving deposits, and mortgages. This means that their returns on investment are predominantly interest-based. That takes the Shariah-compliance out the window.

Now because we Muslims like to modify the financial system in such a way that it SEEMS Islamic, but still caters to all the needs of the investors today, we have modified insurance into Takaful without even checking first if Islam allows for insurance or not. Takaful companies claim that they invest the premiums into non-interest bearing assets, but what they do is that they invest them in variable interest rate securities (that ARE variable but pay interest within a range), or Islamic mortgages (which are doubtful anyway) or Sukuk bonds (doubtful again) or in indexed stock exchange mutual funds, that pay as much as the stock index. This also ensures returns reach a certain mark. Besides, stock exchange indexes like the Dow Jones, Standards & Poors and Dow Industrial are quite predictable.
But they all still violate the basic concept of Tawakkul and insurance by nature is very exploitative in nature. It is because of the exploitative aspect of it that we say it is un-Islamic.

For example, in UK, people pay £400 per year for a complete plumbing cover. Now what are the chances of your boiler breaking down every year? What if it did, then hiring a technician will cost about £150 and it is STILL less than what you pay in premiums. If ALL the plumbing in your house breaks down, THEN the insurance premiums feel worthwhile. But you see, the insurance company knows that, that does not happen every day. At the end of the day, we know that the insurance companies are profitable precisely because they are paying out less than they are getting in premiums.

There is also the effect of insurance on people's psyche: it makes them reckless or greedy. If your mobile hadn't been insured, you would check twice before jumping over the hedge. And recklessness is certainly not encouraged in Islam. There are also all those cases of Arson committed by people on their own properties to claim hefty insurance. There are also all those women/men murdered by their spouses to claim insurance if they are named as beneficiaries.

So Muslims should just try to lean on the best insurance possible: Tawakkul on Allah. So keep the idea of making insurance away from you mind and put all your Trust in Allah alone. So what is the means to achieve the welfare of the society will be another question?

The Zakath system along with Qarz-e-Hasan gives the answer.

Feel free to comment on this. I would like to have improvement in this topic. Thanks for the patient reading.

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1 comment:

  1. salaam,

    great article very informative.

    can you please explain what what is Qarz-e-Hasan is

    how it can be done.

    jazakalla khair. (mumbai)


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