21 Feb

Challenges of Life Insurance Marketing

I learnt how to type first on a Remingten typewriter typing away life insurance policy proposals and articles Aba wrote for the Insurance Journal. From issue dealing with trust to issues dealing with Fiqah and Islamic thought on life insurance, my early education on this subject was primarily on account of the work I did for my father. A few years later the Remington was replaced by a daisy wheel electric type writer and the life insurance proposals were replaced by union negotiations but my education through Aba’s articles and his work continued.

Two decades later I am now a qualified actuary who has worked in the appointed actuary role with three life insurance companies, two conventional, one Takaful and I have personally faced some of the challenges associated with that role that my father foresaw as early as in 1988. If it wasn’t for the work I did on a light blue typewriter as a fourteen year old, I possibly would never have picked up an interest in this field and travelled the eleven year path to become an actuary. As long as you are associated with the insurance industry either as a sales oriented professional, as a manager or as a regulator, the book has something to offer to you.

When Reboot finally came out in print, Aba started putting together all the work he had done over the last 45 years in the field of life insurance on his laptop and between Sama, Nadeem, Sana, Adnan, Fawzia and myself we had a cover, a profile photo and a blog up and running for the book. The book is expected to come out in print before the summer inshahallah and the blog has a complete sample chapter posted on it.


By Rizwan Ahmed Farid

21 Feb

Insurance in Islamic thought: What is Sharia’h?

By Rizwan Ahmed Farid

What is Sharia’h?


Before I elucidate further the Islamic perspective of insurance, the reader needs to appraise the meaning of Shari’ah: simply, Shari’ah means the Islamic way of life as derived from the Qur-ān and the traditions (Sunnah) of Prophet Muhammad. For Muslims the word of Allah is His law and His law is the command of Allah. It refers to both the Islamic system of law and the totality of the Islamic way of life.

The traditions of the Prophet Muhammad (pbuh) being divinely inspired are not only interpretive of Qur-ānic verses but also complementary to them. I quote two ayath 4:59 , and 4:80 of An-Nissah from the Holy Qur-ān:




Thus the Qur-ān and Sunnah are the fundamental roots of Shari’ah. The two other important sources of Shari’ah law are Ijma and Qiyas.

Judicial issues that cannot be resolved by qiyas are resolved through Ijima (consensus) among fuq’ah scholars. The validity of Ijma is based upon Prophet Muhammad’s saying “My people will never agree upon an error.”

Qiyas, i.e. reasoning by analogy, defines laws from known injunction to new injunction. For the validity of Qiyas, M. Hidayatullah, the former Chief Justice and Vice President of India, quotes Faizee and Amir Ali, when the Prophet sent Mouadh Bin Jabal as Chief Justice (and the Governor) of Yemen:

“The Prophet questioned him (Mouadh) to know how he would conduct himself and this is what was said:


Prophet: On what shalt thou base thy decision?

Mouadh: On the Koran.

Prophet: If the Koran does not give guidance to the purpose?

Mouadh: Then upon the usage of the Prophet.

Prophet: But if that also fails?

Mouadh: Then I shall follow my own reason.


The Prophet (pbuh) fully approved of the replies of Mouadh and praised God that His servant was on the right path.”


The Columbia Electronic Encyclopedia has the following entry for Sharia’h:

“Sharia, the religious law of Islam. As Islam makes no distinction between religion and life, Islamic law covers not only ritual but every aspect of life. The actual codification of canonic law is the result of the concurrent evolution of jurisprudence proper and the so-called science of the roots of jurisprudence (usul al-fiqh). A general agreement was reached, in the course of the formalization of Islam, as to the authority of four such roots: the Qur’an in its legislative segments; the example of the Prophet as related in the hadith; the consensus of the Muslims (ijma), premised on a saying by Muhammad stipulating “My nation cannot agree on an error”; and reasoning by analogy (qiyas). Another important principle is ijtihad, the extension of sharia to situations neither covered by precedent nor explicable by analogy to other laws. These roots provide the means for the establishment of prescriptive codes of action and for the evaluation of individual and social behavior. The basic scheme for all actions is a fivefold division into obligatory, meritorious, permissible, reprehensible, and forbidden….

In accordance with the recommendation of the 11th Report, “the Council’s Working Group for Insurance,” was constituted in 1986. The Working Group comprised of the Ulmā members of the Council, Chairmen of the four Government Insurance Corporations, and the then Controller of Insurance, (late) Abdur Rahman Mohammad Khalfay, a Fellow of the Institute of Actuary.

After extensive research and review the working group of the Council held twelve sessions. Beside the takaful modes of Malaysia, Jeddah, Manama, Sudan, and Bahrain, the mutual insurance companies working in various countries, particularly USA, Japan and Canada were examined in detail. The members of the working group found that all the examined takaful models are incompatible with the injunctions of Islamic Shari’ah.

The concept of cooperative risk sharing is the oldest form of insurance. The Grand Council of Islamic Scholars, Majma-al-Fiqh, Mecca, Saudi Arabia, approved Takaful model as a Shariah-acceptable alternative to traditional insurance system in 1985.

“The working group was of the view that any insurance arrangement, which was not of the mutual type, will not be acceptable in Islam. There was also a general agreement that since the constitution of the various Islamic Insurance Companies was not based on mutual sharing of the risks and the shareholders and policy holders of the companies under review are different entities, none of these could be adopted to serve as a model for the working group.”

The Council of Islamic Ideology reviewed the operations of the existing takafuls in order to find a Shari’ah compatible model for Pakistan. Finally, after seven years of hard labour, the Council members unanimously approved its recommendations in its report on Islami Nizam-e-Beema, on 29th April, 1992; and the Council instead of adapting any of the examined takaful proposed its own structure, “the Blue Print of the Islamic Assurance System,” which formed a part of the recommendations. The recommendation of the Council was printed and presented to the government on 2nd Zul Hijja, 1412 A.H. i.e. 4th June, 1992.

The worthy effort of the Council to establish an Islamic country’s system of Insurance on true Islamic mode will prove to be a milestone as a fundamental document. The system of Insurance which may be set up in future on its proposed basis will be free of the elements of gharar, qimar and ribā on account of which the conventional system of insurance in vogue failed to win the confidence of the Muslim Um’mah of over one and a half billion (now, in 2009, one billion eight hundred and thirty million) who have had few options when shopping for products that conform to their faith.

The Council of Islamic Ideology in its report recommended that:

“The Government may promulgate a regular detailed and codified law as the first stage towards establishment of the new institutions of Takaful. This law should have, like the companies and modarabah ordinances, from the basic and essential orders down to all necessary and sectional details as well as detailed procedures of different matters, business, investments, outlines/sketches and proformas etc; full and complete.”

It is interesting to note that the government did not act for thirteen (13) years on the recommendations of the Council. Insurance Reform Commission was constituted in mid 1987 under the Chairmanship of Justice (Rtd.) M. Mahboob Ahmad. Life insurance market reopened to private local insurers through the Finance Act, of 1990, and to foreign insurers in 1994. Privatization of the State Life Insurance Corporation of Pakistan was constantly the topic of the day. Takaful companies were being established around the world in several Islamic countries. The inordinate delay on the part of the government to implement Council of Islamic Ideology’s recommendations does not seem to have any justification.

My exclusive interview in regard to Private Insurance Companies and State Life was published by the Insurance Journal, Karachi, Pakistan, in July-Aug-Sep 92. In response to one of the question in this interview I suggested a blue print and the strategy of privatization of the State Life Insurance Corporation of Pakistan (SLIC) through mutualization, reproduced as follows:

“Insurance Journal: In your opinion how best can the government privatize SLIC?


“Rizwan Farid,


“The Paid-up Capital of State Life Insurance Corporation is only Rupees fifty-five (55) million, wholly owned by the Federal Government. The corporation has also a life fund of over Rupees twenty (20) billion which belongs to the policyholders. Every year the corporation invests substantial fund in government Ruleurities, real estate, stock and bonds and loans to the policyholders against their cash values.


“In my view the government should offer its total share holding of Rs. fifty-five (55) million at a reasonable price. These shares should be bought by the corporation through its life fund as is the practice of the corporation to buy any share of an approved company. By this transaction the corporation would automatically be converted into a mutual insurance company i.e. a company wholly owned by its policy holders.


“Thereafter the policy holders would elect their own Board of Directors consisting about 15 to 18 members who should first be the policy holders of the corporation and be nominated by election by the professional bodies such as Pakistan Insurance Association, Pakistan Medical Association, Pakistan Bar Council, Pakistan Chamber of Commerce and Industry, University Teachers Federation, Pakistan Engineering Council, Association body of the Chartered Accountants, Pakistan Newspapers owners Association, Federation of Working Journalist, one nominee each elected by Karachi, Lahor and Islamabad Stock Exchanges ,besides one director each elected by the Corporations officers, Area Managers, Staff and Field Workers Federations. To get the elected nominee the corporation would also have to use postal ballots


“These elected directors then would select and appoint professionally qualified and experienced persons for the positions of the Chief Executive Officer, and Executive Directors for each function division of the corporation such as, Marketing, Policy Holders Services, Actuarial, Investment, Audit and Accounts, Real Estate, Group & Pension, Personnel & General Service, etc.


“In the United State most of the mutuals started as stock companies and converted to mutual at a later date. Out of 2153 life and health insurance companies in the United Estates117 are mutual at the end of the year 1990.It would be interesting to note that the largest life and health insurance companies are mutual. Mutual insurance companies are very important in the U.S.A, although by number they are less than 6% but possesses almost two third of the total assets of life insurance industry and accounts for about one half of the total amount of life and health insurance business in force in the United States. Similarly out of thirty (30) companies sixteen (16) are mutual writing life and health insurance business in Japan during the year 1990.


“In 1984 out of 169 life and health insurance companies in Canada fifth (50) were mutual companies and many stock companies were seriously considering to convert from stock to mutual companies.


“In mutual insurance company the policy holders are owners of the company and theoretically they control the company. Each policy holder is eligible to vote in the elections of the board of directors on the basis of one vote for each policy holder regardless of the amount or number of policy that the policyholder owns. The operating profits are distributed to the policyholders. Since a mutual company has no stock to sell it cannot be bought by another company as a stock company can be. By means of mutualization the government can successfully avoid future takeovers by any interested and influential group of people.


“By converting State Life Insurance Corporation into a mutual the Government would also succeed in its objective of Islamization as all Islamic school of thought around the world have the consensus that mutual life insurance companies are permitted in Islam. In view of the above I would strongly suggest whenever the government should think to privatize SLIC, the best way would be to convert SLIC into a mutual company, and as a matter of fact it would be justice with the policyholders and good gesture on the part of the government.” (Published in the Insurance Journal, pp. 8-9. Karachi, Pakistan, July-Aug-Sep 92)



Insurance industry professionals were anxiously expecting some dynamic legislation on some system of insurance operations compatible with Shari’ah. Earnest and Young was engaged to draft new insurance legislation. The Insurance Act 1938 was thoroughly reviewed. Some powerful lobbies and vested interest groups who were behind the scene influenced the consultants to delete and totally drop the theme of cooperative or mutual insurance companies, and the election of not less than one third of the Policy Holders Directors on the Board elected by the life insurance policyholders of the company, in the new legislation that was introduced on August 19, 2000 as “Insurance Ordinance 2000”. Thus with a single and silent stroke in drafting the new legislation regarding insurance business in Pakistan the consultants deprived the life insurance policyholders of the say in the management of the affairs of the company; and also killed the doctrine of mutual insurance entities — popular name ‘Takaful‘ when operated in consonance with the established Shari’ah principles — which was strongly and unanimously recommended by the Islamic Ideology Council in its recommendations of 1992.

I earnestly request the government and the parliamentarians to make an immediate amendment in the Insurance Ordinance 2000, and to insert a specific provision for ‘mutual insurance company’ operations and appointment of Policyholders’ Directors on the Board of companies.

21 Feb

Insurance in Islamic thought: The issue of extortion or Akal-e-Haram

By Rizwan Ahmed Farid

The report states that the presence of ‘gharar’, ‘qimar’, and ‘ribā’, make the insurance contract a transaction totally void under the tenets of Sharia’h, because the money extorted by each party, in such a contract, constitutes an illegal income.


The Ulmā refer to the verses 2:188 Al-Baqara and 4:29 An-Nisaah of the Holy Qur-ān:




The Shari’ah Scholars have recommended that since the conventional insurance business in vogue is not based on the idea of mutual cooperation but serves as a device for extortion of money from the people to utilize it in interest bearing ventures, therefore, it is forbidden. The business aims at multiplication of capital in the hands of insurance companies and, therefore, is liable to be considered as illegal in Shari’ah!

The basis of co-operation between capital and enterprise which Islam cherishes is equitable sharing of the risk and gains between them. The Ulamā of the Islamic Ideology Council have deduced that:

“The above verse (A-Nissa – 4:29), can be interpreted that taking away of each other’s wealth, property or capital by unlawful means such as interest, gambling or fraud is prohibited while deriving benefit from each other’s wealth, property or capital under an equitable business deal struck by mutual consent is permitted.”

“The essential element of “trading” is that the return on capital employed depends upon actual operating results of the business undertaken.”

The Council’s report, Beema-wa-Qawaneen-e-Beema, page 12, recommended the following opinion about the lawful, Shari’ah compatible, form of insurance.

” There is no repugnance in Shari’ah if insurance is undertaken with the sentiments of and is founded on cooperation, reciprocal responsibility, mutual surety and volition. If, therefore, an insurance company is established in such a manner that each one of its members is insured and these insured persons enter into a mutual agreement of cooperation and reciprocal responsibility, then such agreement will be lawful in Shari’ah …”


The Council of Islamic Ideology examined the system and laws of insurance and, proposed in its Report, Beema-wa-Qawaneen-e-Beema, in 1984, to the Government that:


“In order to prepare an Islamic alternative, that is, System of Collective Responsibility and Cooperation in place of the existing insurance system, a working group may be constituted in which Ulamā of the Council and the insurance experts may be included. They may expunge un-Islamic elements from the insurance system as per Report of the Council and bring out the alternate Islamic system.”


The reader should keep his mind crystal clear that Shari’ah Scholars of all schools of thought do not condemn the theme, need, importance and viability of insurance system. They question and express their reservations to the conventional model of insurance currently in vogue.

Instead of writing on the need and importance of insurance I would prefer to quote below the Council’s views on the subject:

“In the early stage of the new economic system of the world, Insurance business related to a large extent to the coverage of sea-ships and their cargo. But along-with the growth of industry and trade and banking business in the Western countries the field of insurance also continued expanding in extent. Now it has come to this that sea-ships, aeroplanes, cars, factories, commercial and private buildings and besides human life, human limbs, voice, etc. are also being insured. Due to this, it has assured a regular and vast business proportion. On the strength of their capital big capitalists sell expensive policies to simple minded persons, involving real or imaginary possibilities or apprehensions. Like this, they make hundreds of million dollars annually. This capital is further invested in business and profit is reaped in astronomical figures. In other words, money-business is being indulged in , in many shapes and forms. On the one hand this giving rise to inflation, Ruleondly prices of commodities and services are under extraordinary pressure. Not only this but many economic evils like concentration of wealth, recessions, etc. are also coming into existence which in their own way are a big source of corruption. As, however, the individuals and nations devoid of the wealth of faith and belief have no remedy for these evils, they are treading on these paths only.


“As far as developing countries and economically weak nations like Pakistan are concerned, in this matter they are absolutely helpless and are perforce the target of exploitation of the developed nations.”

21 Feb

Insurance in Islamic thought : The issue of riba or interest

By Rizwan Ahmed Farid

The Council of Islamic Ideology’s report quotes, verse 279 of Al-Baqara:



For, upon a claim on an insurance policy the insured receives more than what he has paid (the premium) to the insurer, the excess amount constitutes ‘Ribā’. Usury is condemned and prohibited in the strongest possible terms. I cite below four verses,2:75-76, 3:130, 4:161 of the Holy Quran and the meaning with commentary, about ribā:

Below is the commentary on the verse 2:275 of Al-Bakara:


“Usury is condemned and prohibited in the strongest possible terms. There can be no question about the prohibition. When we come to the definition of usury there is room for difference of opinion. Hadhrat ‘Umer, according to Ibn Kathir, felt some difficulty in the matter, as the Prophet (PBUH) left this world before the details of the question were settled. This was one of the three questions on which he wished he had had more light from the Prophet. Our ‘Ulmā’, ancient and modern, have worked out a great body of literature on Usury, based mainly on economic conditions as they existed at the rise of Islam”.


“An apt smile: whereas legitimate trade or industry increases the properity and stability of men and nations, a dependence on Usury would merely encourage a race of idlers, cruel blood-suckers, and worthless fellows who do not know their own good and therefore akin to madmen.


“Owing to the fact that the interest occupies a central position in modern economic life, and especially since interst is the very life blood of the existing financial institution, a number of Muslims have been inclined to interpret in a manner which is radically different from the understanding of Muslim Scholars throughout the last fourteen centuries and is also sharply in conflict with the categorical statements of the Prophet (peace be on him). According to the Islamic teachings any excess on the capital is ribā (interest). Islam accepts no distinction, in so far as prohibition is concerned, between reasonable and exorbitant rate of interest, and thus what come to be regarded as the difference between usury and interst; nor between returns on bonus for consumption and those for production purposes and so on.”

21 Feb

Insurance in Islamic Perspective: Takaful – The issue with Gharar

By Rizwan Ahmed Farid

Council of Islamic Ideology, Government of Pakistan, is constituted under Article 230 of the Constitution of the Islamic Republic of Pakistan. One of the important assignments of the Council of Islamic Ideology is to scrutinize the laws in-force in the light of Qur-ān and Sunnah and recommend to the Government such steps by means of which these laws can be made to accord with the Islamic injunctions and teachings.

The Council in its 11th Report, “Beema wa Qawaneen-e-Beema..,” dealing with Shari’ah Law and Insurance, delivered a majority decision on March 1, 1984, that “The contract of insurance, in all its form, is illegal, corrupt, false, forbidden, and cannot be decreed.

The Council has taken the view that the insurance is a transaction which was not dealt with at the time when the Islamic fiqh was being developed. The 11th Report further stated that both religious and judicial scholars have a difference of opinion with regard to the form of the contract, in vogue, for conventional insurance.

The Council of Islamic Ideology’s Report on Islamic Insurance System cited the express opinion of the Majlis-i-Fiqhi Islami about the system of insurance in vogue as follows.

  1. gharar-e-fahish’ (risk)

    “Praise be to Allah and prayers and peace for Allah’s messenger, his progeny, companions and for all those who are guided by Him. Now then:-


    “In its first session which was held at Makkah Mukarrmah on Sha’ban10, 1398 A.H. in the Majlis-i-Fiqhi Islami (the Assembly of Islamic Jurisprudence) deliberated on insurance and its different kinds. The vast amount of writings by the Ulmā on this subject was also kept on view. Also kept in view was resolution No. 55 of Saudi Arabia’s Majlis-e-Hayat-i-Kibar-ul-Ulamā (The Constituent Assembly of Most Eminent Religious Scholars) passed in its tenth session at Riad held on 4.4.1397 A.H. declaring all kinds of commercial insurance as unlawful in Islam.


    With the exception of Honourable Sheikh Mustafa-uz-Zarqa, the rest of the member of the Majlis-i-Fiqhi agreed to conclude that all kinds and types of commercial insurance, whether related to life or commercial goods and wares or other articles are unlawful in Islam for the following reasons:


    “As has been mentioned earlier, in the above referred report, the council expressed the opinion that the main laws relating to insurance and the prepondering bulk of insurance business is in conflict with the injunctions of Islam, because:


    1. There is ‘gharar’ in these contracts.
    2. The element of gambling is present in its extreme form.
    3. There is an element of interest in these contracts and
    4. Such arrangements come within the definition of ‘akal-mal-batil,’ e.g. unlawful acquisition.


    “The report mentioned the view points of six different school of thought; Hanafites, Malikis, Shafites, Humbalies, Zaides, (i.e. the Shiites) and Zahiris on what is ‘gharar’. (The word ‘gharar’ is a derivative from the the word ‘gharar’, which means to lure; allure; entice; tempt; beguile; deceive; delude.’) According to these view points a contract suffers from ‘gharar’ if it is about:


    1. An occurrence about which the parties do not know whether it would happen or not;
    2. A thing which is not within the knowledge of the parties;
    3. A thing whose existence or acquisition is in doubt;
    4. A thing about which it is not known whether it exists or does not exist;
    5. A thing whose acquisition is doubtful;
    6. A thing whose quantum is unknown.”


The Council of Islamic Ideology analyzed various forms of insurance contracts, and has ruled that gharar is present in the contract of insurance, because:

  1. The parties are uncertain (apart from a life assurance policy) whether the loss contemplated under a contract of insurance would ever be payable by the insurer.
  2. At the time of the inception of the insurance contract, the parties are unaware of the exact amount of compensation payable by the insurer, and the time of such payment.


Gharar literally, also implies: uncertainty, hazard, chance or risk, such as, sale of a thing which is not present at hand; or sale of a thing whose consequences or outcome is not known; or a sale involving risk or hazard in which one does not know whether it will come to be or not, such as fish in water or a bird in air. (Glossary of Islamic financial terms. Online)


The Prophet (pbuh) decreed prohibition on transactions of “sale”
involving an element of gharar‘. The Council of Islamic Ideology deduced that any transaction containing Ghararwill be deemed to have been prohibited.
differ regarding presence of ‘gharar‘, ‘ribā’, and ‘qimar,’ in insurance contracts. Qimar and ribā are condemned in the Qur-ān while condemnation of gharar (uncertainty) is supported by the following Ahadith.

“The sale of fish which is not yet caught is not in the state of property. Likewise, the sale of fish which the vendor may have caught and afterwards thrown into a large pond, from which it cannot be taken without difficulty, is null and void because there the ‘delivery’ is doubtful.” (Hedaya page 268)


“The sale of a bird in the air, or of one, which after having been caught, is again set free, is null, because in the one case it is not ‘property’ and in the other the ‘delivery’ is doubtful. (Bukhari Vol.III, page 199, and Abu Daud Vol. II page 634)


The above and other ahadith cited by the Council of Islamic Ideology in its report are with specific reference to the transactions of sale of tangibles only where ‘delivery’ and ‘goods sold’ by the vendor to the vendee is doubtful. The elements of explicit doubt regarding the performance of such contracts make these transactions as containing gharar. And, thus, would result into controversies, casting fraudulent intentions on the part of the vendor.

Risk management in the insurance business deals with pure risk which is transferred from an individual to the insurer who charges a service fee for agreeing to accept the risk. Pure risk exists when there are no potential gains, only possibility of financial loss. For example, personal injuries, sickness, hospitalization , partial or permanent disabilities; road or industrial accidents, fires, and thefts; forgeries, personal, professional or product liabilities; sea perils and high-jacking; tsunamis, earthquakes, windstorms, floods, water damages; kidnapping for ransom, terrorism, riots, war and warlike operations; etc., are forms and events involving pure risks.


Insurers do not address speculative risks that involve chance of loss or gain, whereas in pure risks there is only the probability of loss or no loss. The insurer accept only the risks which besides the capability, inclusive of reinsurance treaties, of the insurer to absorb the quantum of the probable loss. The risk must normally be accidental in nature, from the the insured’s perspective free from moral hazards, predictable, measurable, spread over a large number of similar eventualities, and acceptable to the insurer.


In fiqh literature the term gharar is associated with risk and uncertainties in contractual agreements. Bay’al-gharar prohibited by the Prophet (pbuh) includes selling fishes in the pond and birds in the sky. In shari’ah contract becomes null and void where presence of gharar in contractual obligations is found.

Allah hath permitted trade and forbidden riba. (Al-Baqarah: 275). In trading ‘Al-bay’ is a contract of sale, and no sale transactions in Islam or any other religion is free from risk of market, physical or natural calamities. Taking these risk is the legitimate way of doing business which is called ghorm i.e. price and market risks, etc. A person cannot expect to make profit without assuming probability of loss or risk in his ventures.

Gharar is indeed different from ghorm, although the English translation of both has applied the same term interchangeably: risk and uncertainty. Rosly, Saiful Azhar, writes:

Gharar or ambiguities about the buyer or the seller, the object of the sale and its price must be avoided. In fact, using the term “ambiguities” is more accurate than risk and uncertainties when one is dealing gharar in contractual agreement.”