SS 26 – Islamic Insurance

The purpose of this standard is to present the Shari’ah rules that govern Islamic Insurance, as well as the characteristics, basic aspects, principles and types of Islamic Insurance. The standard also aims to indicate the controls that Islamic financial Institutions (Institution/Institutions) should observe in this connection. The word (Institution/Institutions) is used here to refer, in short, to Islamic financial institutions including Islamic Banks.

Scope of the Standard

This Standard covers Islamic Insurance in terms of its definition, Shari’ah status, characteristics, principles, basic elements, types, and how it differs from Conventional Insurance. The Standard also sets out the controls to be observed by the Islamic financial Institutions offering products based on Islamic insurance. However, it does not cover social insurance schemes arranged by the state. 2. Definition of Islamic Insurance in Contrast with Conventional Insur- ance Islamic Insurance is a process of agreement among a group of persons to handle the injuries resulting from specific risks to which all of them are vulnerable. A process, thus initiated, involves payment of contributions as donations, and leads to the establishment of an insurance fund that enjoys the status of a legal entity and has independent financial liability. The resources of this fund are used to indemnify any participant who encounters injury, subject to a specific set of rules and a given process of documentation. The fund is managed by either a selected group of policyholders, or a joint stock company that manages the insurance operations and invests the assets of the fund, against a specific fee. As for Conventional Insurance, it is a Mu’awadah (mutual compensation) contract that seeks to make profit out of the insurance operation itself, and, hence, is subject to Shari’ah rulings on financial dealings that involve Gharar (uncertainty). Consequently, conventional insurance is banned by Shari’ah. 3. Status of Islamic Insurance According to Fiqh (Islamic Jurisprudence) Islamic insurance is based on the commitment of the participants to make donations for the sake of their own interest. The participants, therefore, protect their group by payment of contributions that constitute the resources of the insurance fund, and assign the management of that fund to a committee of policyholders, or to a joint stock company that possesses the license of practicing insurance business. In the latter case, the company assumes this job on the basis of a remunerated Wakalah (Agency) contract. In addition to managing the insurance operations, the committee of policyholders or the company also assumes the responsibility of investing the assets of the fund through Mudarabah or investment agency.