Shariah Compliant Insurance
Backgound on Shariah Compliant Banking
There has been a lot of talk recently about "Islamic Banking". Some of it has been positive, and some negative. Most of the talk has focused on interest-free banking accounts, loans, mortages and investments. There is no doubt that as Muslims, we must ensure that all of our dealings are within the boundaries of the Shariah. Therefore, it is definitely encouraging to see all of these attempts to provide Shariah compliant alternatives to modern interest-based banking systems. There are surely going to be ups and downs along the way. Some institutions will fail, while others will thrive. Some institutions may try to use the "Shariah" or "Islamic" label purely for the sake of marketing and making more sales. Some will offer authentic Shariah compliant services, while others will simply try to re-work the existing interest-based banking model to look more "Islamic". But it is surely a good trend to see Muslims moving towards Shariah compliant banking, and over time a stable and authentic Shariah compliant banking system will be established. This process is helped greatly by individual Muslims who decide to put their money with these institutions as they build themselves up. It will take time, maybe decades, to build a strong and solid system, just as interest-based banking has taken many decades to become what it is today. So we need to be patient and to do our best to support these new institutions, mainly by doing business with them, and providing advice to encourage them to continously improve their services.
Problems with Commercial Insurance
There has been much less talk, however, about Shariah compliant insurance. Recently, with all of the debate going on in the United States regarding medical insurance, the flaws of commercial insurance have become evident. Large insurance companies use their financial resources to lobby government to block any measures that would cut their profits. The main goal of these insurance companies is to make profit. This is not surprising, since they are corporations owned by shareholders who are looking for the maximum return on their investments. To maximize their profits, insurance companies have every incentive to increase insurance premiums and to minimize payouts on their insurance policies.
This issue is most clearly evident in the health care system of the United States, where health care is mostly private, and large insurance companies provide health insurance for the majority of the American people. These companies take advantage of the prior medical history of their customers in order to increase premiums and to deny them coverage, based on what they call "pre-existing conditions". They have the financial resources to hire medical experts who are paid large salaries in order to find any excuse to deny people coverage. They can also hire expensive lawyers whenever they are taken to court. In contrast, the lone individual who is denied care has limited financial resources to put up a fight, and usually ends up suffering quietly. People lose their homes in order to pay their medical bills when they are denied coverage, even though they thought they had medical insurance, and have been paying for it for many years.
In 2010, president Obama signed a new healthcare bill that attempts to address some of these problems. The new law will attempt to extend covarage to almost all Americans, and will prevent insurance companies from denying people medical coverage based on "pre-existing conditions". However, the law does not address the roots of the problem. Insurance will continue to be provided by for-profit corporations that will continue to be motivated purely by profits. Share prices, bonuses for executives and dividends for shareholders all will continue to depend on maximizing revenue (insurance premiums) and minimizing costs (pay-outs for coverage). The state of health of their customers is not a factor. Even if the new law places some restrictions on these companies and extends coverage to those who cannot afford it today, these huge corporations with all of their financial resources will be able to find ways to continue making profits. Although the United States has a very good health care system, receiving this top quality care is very expensive, and is limited to the small fraction of the population who can afford it. Other nations have tried different paths, including fully socialized medicine where all medical care, hospitals and doctors are government employees. Although this solves the problem with insurance companies making huge profits by denying people coverage, the quality of care is not as good due to government bureaucracy and inefficiency. So what is the solution?
Shariah Compliant Insurance
Shariah compliant insurance is the solution. Islam provides a perfect balance between a free market and social security. While private business and hard work to earn profit is highly encouraged, giving in charity for those who are less fortunate is also encouraged. For example, Zakat requires every Muslim to pay of 2.5% of their wealth that has been saved for more than one year to those who are less fortunate. This ensures that the wealthy who has large sums of money saved continue to provide some support to those who are in need. Although Islam recognizes the need for allowing private business, it also tries to encourage these private businesses to be ethical. Shariah compliant insurance is another instrument to help maintain this balance.
Although we have only discussed medical insurance so far, this is simply because it is usually the most important type of insurance for people. After all, it relates directly to their health, and in some cases it could be a matter of life or death. Also, the costs of medical care are so high that being denied coverage usually means either making great sacrafices to cover the costs, such as selling a home, or just not getting the best health care they need. However, the same issues apply to all other types of commercial insurance, including car and home insurance, and possibly other types of insurance such as life insurance. The root cause of the problems in the medical health insurance system still exists for all other types of insurance. They are less discussed only because the results are usually not as tragic or dramatic as when the issue is related to health care.
The main concept behind Shariah compliant insurance is the idea of cooperative insurance. This means that instead of providing insurance through for-profit insurance corporations, non-profit cooperatives would be used instead. The way these institutions would work is that they would employ enough experts to operate the organization efficiently. Those seeking insurance would purchase a policy with the cooperative. All of the revenue collected would be invested by the cooperative in order to generate some profit, whether it is invested in other companies in the form of stocks, or in real estate projects, etc. At the same time, policy holders are able to submit a claim and get coverage, just in the same way as with regular insurance companies. The difference is that since the cooperative is non-profit, there is no incentive for the cooperative to deny claims or to raise insurance premiums needlessly. The premiums are set to cover the expected claims, as well as the costs of running the cooperative. Since there are no shareholders who are taking profits, the premiums will naturally be lower than those with a for-profit insurance corporation. So what happens if at the end of the year there is more revenue than expenses? Or more expenses than revenue? The premium for the following year is adjusted accordingly. Another advantage of this arrangement is that the money that is held by the cooperative is invested, and any returns on the investment are used to lower premiums. Alternatively, the returns on the investment could be distributed to the policy holders.
This type of cooperative insurance would be Shariah compliant, because it is a form of cooperating on piety and good deeds. There is no taking advantage of those who are sick, or who have had a car accident, or a house fire, by raising their premiums or denying them coverage. It is simply a large group of people who get together to help each other when one of them faces the difficult circumstances that always come with filing an insurance claim.
Such a Shariah compliant insurance cooperative could be a private non-profit institution, or it could be operated by a government. Some will argue that a private organization would be better managed, more efficient and less wasteful. Others will argue that only a government can run such a cooperative. There is no Islamic restriction on the exact implementation of these ideas, as Islam encourages us as humans to manage our lives in the best way that we see fit. Islam only gives us general guidelines in order to ensure fairness and ethics are maintained, and rights are protected.
So now, it is up to us Muslims to put these ideas into practice. There is no doubt that if a serious attempt at starting a Shariah compliant insurance cooperative is made, that is well-planned and properly run by qualified individuals, that it would be a huge success. And not only among Muslims. Anyone who compares the advantages of this cooperative system to what exists today will definitely want to switch to the cooperative model. It solves all of the problems of commercial insurance corporations, while being more cost-effective. Most important of all, it is simply more ethical.
May Allah (swt) guide us all to what pleases him.