This is an important question. I will answer it briefly because it requires a detailed research paper.
Firstly, the definition of insurance:
Professor Muṣṭafā az-Zarqā defined the insurance system in the view of legal scholars as a contractual system based on exchange. Its purpose is to cooperate in repairing damages caused by sudden risks through organized institutions that conduct their contracts on technical bases. Therefore, it is a financial exchange contract in which each party assumes a financial liability, known as a premium by the insurer and compensation by the institution. In terms of jurisprudence, the concept of insurance was not directly addressed in the traditional jurisprudence.
The first person to discuss it, according to what we know, was the Ḥanafiy scholar Ibn ʽAābidīn, who called it the contract of “Sūkrtāh” and began with the idea of maritime insurance for some ships and cargo in ports. Imam Ibn ʽAābidīn issued a fatwa prohibiting it due to its lack of clarity and the obscurity of its contract at that time.
Contemporary scholars have differed on this matter. Some have said that it is a prohibited contract, and their main justifications include: “Gharar” (uncertainty), “Jahālah” (ignorance), and “Maysir” (gambling). It contains “Gharar” and “Jahālah” due to the fact that the consequence is unknown, and both parties cannot know at the time of the contract how much they will give or take. For example, the insured may pay a premium, and then a risky incident occurs, in this case, the insured is entitled to receive what the insurer promised. If no risky incident occurs at all, the insured pays all the premiums without receiving anything in return. It also contains “Maysir” due to the possibility that the insurer may pay a small amount and win a lot without legitimate work and entitlement based on Islamic law.
The previous justifications are the main reasons for those who prohibit insurance.
As for our evidence for its permissibility, it is as follows:
1. Analogizing insurance to the contract of “Mawālah” (loyalty), which is considered by the Ḥanafiys as one of the causes of inheritance. The contract of “Mawālath” is when an unknown person says to someone: “You are my guardian that you ransom me if I commit a crime and inherit me if I die.” It implies assuming financial liability, which is similar to the contract of insurance because each party assumes a financial liability towards the other.
2. Analogizing insurance to the system of “ʽAāqilah” (one’s family), which is when the family of an accidental killer pays compensation on his behalf. It is a type of mutual assistance and is similar to insurance in two ways: first, it guarantees a sum of money in case of an incident occurs. Second, it is paid by those who did not commit the wrong. It is worthy to note that the system of “ʽAāqilah” is supported by evidence.
3. Analogizing insurance to the guarantee of road risk. For example, when a person tells another to take a certain road because it is safe. Hence, if something happens to him on that road, then the first person guarantees to compensate the second person. The Ḥanafiy school mentions this type of contract in the chapter of “Kafalāh” (guarantee). Although the risk here is uncertain, we see that it is permissible according to the Ḥanafiy scholars.
4. Referring to the principle of contractual commitments and binding contracts in the Mālikiy school of thought. The essence of this principle is that if a person promises another something that he is not originally obliged to do, such as lending him money, bearing a loss on his behalf, lending him something, giving him a gift, or the like, then he becomes bound by his promise according to the Mālikiy school of thought. Similarly, we see that insurance companies commit to paying a specific amount in case of an accident or death, and they are bound by it. Therefore, if a commitment made by one party is put into force, then the same applies to a commitment made by two parties.
5. Analogizing insurance to the contract of “Ḥirāsah” (guardianship), which is permitted by Islamic jurists. The essence of the contract of insurance is actually achieving security. The hired guardian may perform a task, which is to provide guardianship, and his work does not have any effect or result other than achieving security for the person who hired him and ensuring the safety of the protected thing from any attack by a person or animal. The same is true in the contract of insurance, in which the insured pays a portion of his money to obtain security from potential risks.
Let us consider the following cases that are common between the contract of insurance and the contract of guardianship: A guardian may work for an employer for years without any risky incident occurring, yet both parties are bound by their commitments, and the employer pays the guardian his salary. A guardian may work for only one month, and then a risky incident occurs, and he dies, so he only benefits from his salary for one month. The same applies to insurance. So why is the contract of guardianship permissible and the contract of insurance is not?
The issue of “Gharar” (uncertainty) and “Jahālah” (ignorance) is a relative matter. Islamic jurists have turned a blind eye to minor “Gharar,” and yet I believe that all transactions have some level of “Gharar.” For example, when someone buys a house, do they inspect its foundations and corners, or do they buy it based on its visible appearance? When someone buys a used car from an auction, do they know everything about it, or do they assume that the seller is honest? Moreover, when a doctor prescribes medicine for a patient, does he guarantee that it will work, or is it possible that it may not? The question here is should we nullify all contracts in these situations? Therefore, the prohibited “Gharar” is like selling a bird in the sky or a fish in the water, while the minor “Gharar” is common in use and exempted.
As for gambling, it is far-fetched in this regard because each party knows in advance what they are paying and receiving. Furthermore, the service contracted, in addition to the compensation received, is the principle of security, which is a commodity that is bought and sold nowadays. Ibn Taymiyyah said in his book “Al-Qawāʽid an-Nūrāniyyah”: “Regarding ‘Gharar,’ the strictest in forbidding it are Abū Ḥanīfah and Ash-Shāfiʽiy, but the prohibitive principles adopted by Ash-Shafiʽiy are more abundant than those of Abū Ḥanīfah. As for Mālik, his school of thought is the best in this matter, as he permits the selling of these things and all that leads to a need or has minor ‘Gharar.’ ʼAḥmad is close to him in this regard.”
Look at Ibn Taymiyyah’s flexibility and praise of the schools of thought of Mālik and ʼAḥmad in tolerating some level of “Gharar” to facilitate people’s affairs.
I recommend the book “The System of Insurance, its reality and its Ruling in Sharīʽah” by our respected scholar Muṣṭafā az-Zarqā. Most of my evidence is taken from his book.
After all, Allāh knows best.
Fatwa by Dr. Khālid Naṣr