Question

Why insurance is necessary for economic development of a country? What are the objections raised by Islamic scholars about conventional insurance and how those issues are addressed by Islamic insurance?

Answer 1

Insurance is a necessary service. It covers contingent liabilities occuring due to death, illness or any mishap.

Insurance companies earn a lot of money through premiums and to offer better returns invest mainly in low risk govt. bonds and securities. This money is used by govt. to invest in mainly development projects and hence human and physical capital is improved in a country. It also stops people in becoming economically vulnerable as it pays for mishaps and also also gives tax deduction benefits.Insurance holders also earn money as bonus and interest/inflation adjusted returns.

Muslims believe that conventional insurance products include gambling , extreme uncertainty, interest and investment in haraam (forbidden) activities as explained above.

Islamic insurance is based on principles of mutuality and co-operation. Conventional insurance may have a fund manager.Islamic Insurance transfers ownership of the Takaful (Insurance) fund and operations to the policyholders and they manage money. Policyholders share profits/losses. Conventional term plan may not pay anything if claim is not made but Islamic insurance require all investment gains and losses to eventually be shared and insurance company will not be sole beneficiery and similarly claims will also have share by claimant.