Answer
Wa `alaykum As-Salamu wa Rahmatullahi wa Barakatuh.
In the Name of Allah, Most Gracious, Most Merciful.
All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.
Dear questioner, we are very pleased with your question which revolves around one of the economic aspects of the Sharia`h, the divine legislation revealed to regulate man’s affairs.
With regard to your question, we would like to stress that insurance companies emerged as a corporate bodies carrying out some sort of transaction new to the Islamic Fiqh, for it was not known at the time of revelation of the Shari`ah nor at the time of the great scholars who founded the known Fiqh Schools.
Insurance companies offer variety of services, including what is called commercial insurance. All categories of this kind of insurance are haram from the Shari`ah point of view since they are interest-oriented dealings, and this is something textually prohibited according to the Glorious Qur’an and the Prophetic Hadith.
What also makes such transaction haram is the fact that they involve gambling which is unlawful and gharar (undue uncertainty) which is also prohibited for it entails devouring people’s properties wrongfully.
Tackling the issue in detail, the prominent Saudi Islamic lecturer and author, Sheikh Muhammad Salih Al-Munajid, states:
All types of commercial insurance no doubt entail riba (interest) because you pay a specific sum of money and take a larger or smaller amount should a risk occur.
Accordingly, this coverage contains Riba An-Nasi’ah interest on lent money) and Riba Al-Fadl (exchanging a superior thing of the same kind of goods with more of inferior quality of the same kind of goods), for as we know, the insurers take premiums from those under this coverage and promise to give them smaller or larger amounts should a risk occur to the insured. No doubt, this is the very same Riba which is prohibited according to many Qur’anic verses.
All types of commercial insurance no doubt involve gambling which is prohibited in Almighty Allah’s saying, “O you who believe! Strong drink and games of chance and idols and divining arrows are only an infamy of Satan’s handiwork. Leave it aside in order that ye may succeed.” (Al-Ma’idah 5:90)
All types of insurance include ambiguity since the insurers say to you, “pay such premiums and in case a risk occurs to you we will pay you such a sum of money.” No doubt, this is the very same gambling. Even distinguishing between insurance and gambling is an unreasonable contention that cannot be accepted by sound mentality. Rather, insurers themselves concede that insurance involves gambling.
All types of commercial insurance contain gharar, which is prohibited according to many sound hadiths. We may cite here the hadith narrated by Muslim on the authority of Abu Hurayrah (may Allah be pleased with him) who said that the Prophet (peace and blessings of Allah be upon him) prohibited Bai` Al-Hasa (i.e. sale by means of pebbles, in which the purchaser tells the seller that when he throws a pebble on his goods, the sale contract will be confirmed or the seller tells the purchaser that on whatever thing a pebble thrown by him falls will be sold to him) and Bai` Al-Gharar (to sell a thing which one doesn’t have in one’s possession, nor expects to bring it under one’s control, e g. fish in the river, or birds in the air).
All types of commercial insurance entails an unbearable amount of ambiguity or gharar , because all insurance companies and all those who offer insurance coverage prohibit absolutely insurance against any thing that is not liable to risks. This means that liability to hazards is a pre-condition to insurance coverage. It is also prohibited to know in advance the exact time of happening a risk nor the amount of money you will take should an incident happens. Thus, insurance includes the three types of the unbearable gharar.
Therefore, all categories of commercial insurance represent devouring people’s properties wrongfully which is prohibited according to the text of the Glorious Qur’an, “O you who believe! Eat not up your property among yourselves in vanities…” (An-Nisaa’ 4:29)
Moreover, commercial insurance with all its forms is a trickery operation to eat up people’s property illegally. One of the accurate statistics conducted by a German expert have proven that the proportion that goes back to people in comparison with what they pay does not exceed 2.9%.
So, insurance is a great loss for the Ummah. As for the disbelievers whose bonds of affection and mercy were corrupted and vanished, they were forced to resort to this kind of transactions however they hate it as they hate death.
Moreover, Sheikh Faysal Mawlawi, the late deputy chairman of the European Council for Fatwa and Research, adds:
Commercial insurance is originally haram as agreed upon by most contemporary scholars. It is well known that in most non-Islamic countries there are co-operative and mutual insurance companies. There is no harm from the Shari`ah point of view to participate in these services.
So, it is unlawful for a Muslim living in a country where there is such a co-operative insurance company to make an agreement with a commercial insurance company.
But, if a co-operative insurance company is not found one may enter into a contract with a commercial insurance company only by way of necessity. If a person is forced by law to insurance or by way of need, it is obligatory for him to be content with the minimum proportion of insurance that covers his need or to the minimum of such transaction he’s being forced to carry out.
Almighty Allah knows best.