Objections relating to the insurance contract itself are those of riba (usury), gharar (uncertainty), and maysir (gambling). The other objections relating to market practice are usually concerned with two issues: The first is that insurance companies’ investment policies are generally interest-bearing (which is not acceptable in Islam), and the second issue is the fact that life assurance is considered to breach Islamic inheritance rules by distributing the sum assured among beneficiaries. These objections relating to market practice can be easily overcome by the insurer making changes to their company policy, as they do not affect the insurance contract itself.
The objections related to the contract itself, however, require the restructuring of insurance contracts to be in line with shariah.
Riba (Usury)
Under a conventional insurance contract, the insured pays the insurance company a premium (either as a lump sum in general insurance or as installments in life insurance), in exchange for financial compensation at the time of a claim, subject to the happening of an insured occurrence or event. Claims are generally larger amounts than the premium paid. Islamic law objects to this payment on the grounds that a small amount of money (premium) is being exchanged for a larger amount of money (claim). Scholars consider this an unjustified increase of money, and therefore riba. Islamic insurers therefore have to structure their operations and investments to avoid riba.
Gharar (Uncertainty)
Gharar can be defined as uncertainty or ambiguity. Islamic law seeks to avoid ambiguity in contracts, in order to prevent disputes and conflict between parties. This is a general Islamic principle that must be applied to all contracts, including insurance.
In the case of conventional insurance, neither the insurer nor the insured knows the outcome of the contract (i.e., whether a loss will occur or not). The insurer is entitled to get the premium in all cases, whereas the insured may not receive a claim because the payment of claims depends on the probability of loss occurrence (which is a random variable). Other uncertain elements are as to when the claim may be paid and how much the insured may receive.
In life assurance contracts, gharar can be seen to exist even in the premium, as the insured party does not know how much he will pay to the insurance company each year, or for how many years. The insured may know the monthly or yearly premium, but he does not know how much he will pay to the insurer before he dies. In general insurance (nonlife insurance), the premium is pre-agreed, but there is gharar in the claim amount. Therefore gharar exists in all insurance contracts, either in premiums or in claims. In Islamic insurance, scholars agree that engaging in takaful transactions, with a donation element as part of their contribution, offsets gharar.
Maysir (Gambling)
Some arguments against conventional insurance are based on the grounds that insurance contracts are basically gambling contracts. Islam rejects any contract where financial gain comes from chance or speculation. Insurance, however, needs to comply with the principle of insurable interest. This principle requires a financial and legal relationship between the insured and the subject matter of insurance. The insured is only entitled to get a claim if he proves his insurable interest, and this feature therefore nullifies the notion that insurance is a gamble.
The other difference between gambling and insurance is that the first is a speculative risk (which is uninsurable), while the latter consists of pure risk only (i.e., the insured should not make a gain but should be put back into the same financial position as before the loss occurred).