Ethical Insurance

By Firoj Khan

Islamic finance places strong emphasis on the economical, ethical, moral, social, and religious dimensions, to enhance equality and fairness for the good of society as a whole, whereas the conventional financial system focuses primarily on the economic and financial aspects of transactions. As a result Islamic insurance might also be seen as an ethical insurance.

Islamic insurance is provided under a principle called Takaful. The term "Takaful" is derived from the Arabic word "Kafaala" meaning guaranteeing. Takaful means "guaranteeing each other" and refers to the concept of permissible Islamic insurance or "Halal" insurance.

Islamic insurance or Takaful is based on the principles of "Ta'awun" (mutual cooperation) and "Tabaru'a" (Donation) whereby a group of people (Takaful participants or policyholders) agree between themselves to share the risk of a potential loss to any of them by making a donation, of all or part of their contribution, which is used to compensate the loss suffered by any participant of the Takaful scheme. Unlike conventional insurance in which risk is shifted from the policyholder to the insurance company, Takaful is a structure in which risk is shared between all the policyholders.

Additionally Islamic insurance can also be seen as an ethical insurance product because of the additional levels of governance required to ensure it is Halal.

Islamic finance principles have been derived from the Holy "Qur'an" (the Holy book of the Muslims), "Hadith" (the sayings of the Holy Prophet Muhammad PBUH), "Sunnah" (the way the Holy Prophet Muhammad led His life) and centuries of scholarly interpretations of these three sources. These rules define clearly what is "Halal" (permissible) and what is "Haram" (prohibited) in a financial transaction. The salient points of these rules are:

Shariah prohibits the following:

• 'Riba' - interest/usury


• 'Maysir' or 'Qimar' - gambling/speculation


• 'Gharar' - uncertainty


• Exploitation


• Unfairness


• Undertaking Haram activities (alcohol, pork, pornography etc)


• Shariah requires:


• Risk sharing


• Reward sharing


• Fairness


• Transparency


• Sanctity of contracts

Strict adherence to these principles means that Islamic insurance products can also be a viable alternative for the growing number of ethically-motivated consumers who wish to buy an ethical insurance product.

Salaam Insurance is the UK's first dedicated Islamic Insurance Company that provides Islamic insurance based on the Shariah principle of Takaful.