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Study On The Nature Of Islamic Insurance

Nigeria is country with over 120 million Muslim over 75% of its population are Muslims, considering this it is only fair and just that the belief and values of this vast majority be respected and reflected by providing them avenues of insuring and/or assuring their lives and property without necessarily violating the shari’ah, which is detrimental to them in this world and the Here-after. The main reason why researcher wants to carry out this research was to identify the possible problems and prospects of Islamic insurance in Nigeria.

But before going deep into the main objectives of the research let me start by giving a brief background of both conventional and Islamic insurance (TAKAFUL).

These days the inspiration for Islamisation of insurance is at its peak. Many Individuals as well as investment institutions are taking measures in order to islamise the sector of banking and insurance. Insurance has been defined in various ways by different writers of different professions (lawyers, economist as well as sociologist), depending on the message they are trying to put forward. Essentially, there is no fundamental departure in meaning between definitions given by conventional writers and Islamic writers. In fact they are widely used interchangeably.

There is a general agreement amongst most economists that the essence of “insurance lies in the elimination of uncertain risk of loss for the individual through the duals, who each contribute to a common fund through premium payments, sufficient to make good the loss caused to anyone individual?.

M.N Siddiqi (1985) sees insurance as based on a social scientific discovery, according to which after a small investment, individuals can be freed from incurring financial losses as a result of perils and accidents, whose incidence can be measured fairly accurately in relation to a large human groups.

Insurance is a device for the reduction of the uncertainty of one party called “the Insured?, through the transfer of particular risk to other party called “the Insurer?, who offer a restoration at least in part of economic losses suffered by the Insured (Pfeiffer 1956).

In its larger concept, insurance have also been defined “as the business that exists in order to ensure the success and survival of other businesses? (Prof. J.O. Irukwu, 1981).

Conventionally, insurance can also be defined in three different ways by three different kinds of professionals; the lawyer would define it “as a contract whereby a person called the insurer of assurer, agrees in consideration of money paid to him, called premium, by another person called the insured or assured, to indemnify the latter against loss resulting to him on happening of certain events. The policy is the document in which is contained the terms of the contract? (Osborne Law Dictionary). The economist would prefer to define it as ‘a device for the transfer of some risks of economic loss from the insured who’s otherwise would have bourne the risk, to an insurer in return for a premium’. Whereas the sociologist’s perception of insurance are it’s a device whereby the participants provide financial compensations or succor to those among them encountering the many misfortunes or contingencies that befall humanity. Under a modern insurance system, payments to those who suffer losses are made from the accumulated contributions of all those participating in the insurance system’ (J.O. Irukwu, 1985).

The sociologist is more concerned with the social aspect of insurance; how it relates to social interrelationships, whereas the economist is interested in the gains in monetary terms, and the lawyer, the legal aspects. The Islamic economist on the other hand, is concerned about all the above aspects in addition to the moral, ethical, material and spiritual virtues of insurance.

However, while the aims and aspirations of insurance may be similar in principles in a secular as in Islamic communities, the ‘modus operandi’ will have to be different in order to accommodate the moral and spiritual requirements of the latter.

Insurance has been in existence long before the coming of Islam, there is a general consensus that marine insurance is the earliest form of insurance and it is generally agreed that it had its origin in Rome, later in the 14th – 15th centuries. Later it spread to the other parts of the world via Britain and Western Europe this view is held by M.A Mannan (1975) and J.O. Irukwu (1985) amongst others.

History also shows that an indigenous form of insurance also existed, more than four thousand years ago in China, where the Chinese merchants pooled their rice cargoes by placing a tradition of each man’s cargo on several junks (boats) instead of an entire cargo in one junk. This pooling arrangement reduced the chances of one man experiencing a huge financial setback. If a cargo was lost, all merchants would experience a loss, but no merchant would undergo total loss (S.S Yings, 1975).

Muslim traders also practice the concept of insurance for over 1400 year ago by the Muhajrin (emigrants) of Mecca and the Ansar (supporters) of Medina following the hijra of the Prophet Muhammad (PBUH). In the past Muslim traders felt the necessity of insurance, in olden days they used to ships their goods across the seas to other part of the world and they mutually arrange for safeguards against the risk of the sinking of ship. They usually contribute certain amount to form a pool which will be used to compensate any trader that suffers losses as a result of perils and accident.

Over the last three to four decades now this new version of Islamic insurance (TAKAFUL) has become popular and continued to gain popularity in different part of the world including non-muslim countries. Takaful is an Arabic word meaning “guaranteeing each other? was considered to be an alternative form of insurance based on the concept of cooperation, social solidarity as well as mutual indemnification of losses of members. It is a form of co-operative insurance, where by members contribute a certain sum of money to a common pool. The purpose of this system was to uphold the principle of “bear ye one another’s burden? not to create profits.

Insurance today is indispensable and inevitable in any modern economy, it has become ‘a necessary evil’ one has to involve in either voluntarily or involuntarily (government policies compel owners of vehicles or businessmen or creditors or debtors to the banks to insure their property). So Muslims are in a dilemma; in that, Islam strongly prohibits usury of any form (see Qur’an II, 275 & LXXII 20) while the modern economy is based on interest to such an extent that it is difficult to visualize any economic relations where interest/usury does not come in, directly or indirectly.

So our great challenge today, as Muslims is how to eliminate interest/usury and evolve new institutions and practices which would enables economic activities in Nigeria to flourish without resort to ‘riba’ and other evils associated with the modern economy. That is why the researcher carries out this research study in order to look at the basic principles of Islamic insurance as well as to analyze the possible problems and prospects of Islamic insurance in Nigeria.


To identify the basic principles of Islamic insurance.

To identify the nature and coverage of Islamic insurance.

To identify the possible problems and prospects of Islamic insurance in Nigeria.


Islamic insurance is free from Riba (usury) and other evils associated with conventional insurance and can even be more profitable.

To take advantage of this scientific discovery in line with divine guidance is not only desirable, it is also indispensable for the progress of Islamic civilization – human civilization.

Considering that Nigeria is largely a Muslim country, with about 120million Muslims (over 75% of Nigerian population are Muslims), it is only fair and just that the belief and values of its vast majority be respected and reflected by providing them avenues of insuring and/or assuring their lives and property without necessarily violating the shari’ah, which is detrimental to them in this world and the Here-after.


What is the nature of Islamic insurance?

What are the items and aspects for which insurance is permissible in Islam?

What are the local customs and traditions that are supportive of Islamic insurance system?

What amendments are needed for the smooth running of Islamic insurance?

What are the problems and prospects of Islamic insurance operating side-by-side with conventional insurance system as separate institutions?


Nigeria is a country with a large percentage of Muslims but operates a secular form of government. The economic system of the country is pro-west, with its attendant injustice and exploitation. All these combine to militate against the evolution or establishment of an Islamically acceptable system in Nigeria.

The problem associated with this research is there is not much available data for this research especially in the field of Islamic Insurance in Nigeria, due to the shortage of professionals in this field not as in the conventional Insurance.


The study is based on sources from existing available literature, whereby relevant books are consulted. Data are described and analyzed with reference to the research questions and objectives and reported in three chapters: introduction; review of relevant literature and data analysis and conclusions and recommendations.


This research is constrained by the limitation of relevant literature on Islamic insurance. In addition, limitations of time and financial resources are other constraints faced by the researcher.

Chapter two

Literature review

This chapter will be devoted to review of literature by other writers on the subject of Islamic insurance, writers have done quite a lot of work in this field by the way of defining Islamic insurance and clearing doubts about its controversy in Islamic and establishing its importance in the present day economic settings. There are also contributions on the form and items that are permissible in Islam and also suggestions on the mode of operation of Islamic insurance. We intended to look into these issues later in this chapter.


Modern insurance as it is today came to Nigeria not more than seven decades ago – several centuries younger than trading activities in the country. Long before the coming of modern insurance, some form of social scheme existed in various part of the country, this form of social scheme evolved through the existence of extended family system and social association such as age grades and other union. “The simplest form of the social insurance was practiced by means of providing cash donations, materials or sometimes organized collective labour to assist members of extended family and members of social or communal associations who suffer a mishap? (T. O. Yusuf, A. Gbadamosi, & D. Hamadu 2009). The funds are used to help any member of social or communal who may suffer from misfortune such as accident, illness, death or unemployment.

Despite urbanization and the attendant loosening of family and communal ties, some form of social scheme is still widely practiced by community groups as well as sections of middle-class Nigerians (Osoka, 1992).

Also a similar kind of this social scheme or social security was said to had existed in Northern part of Nigeria, during the then Sokoto Caliphate, the first caliph mounted an impressive labour policy and also used to give pensions and accident allowances to employee afflicted by patsy or permanent disease during the time of his employment and gets the wages continuously paid to him. If dead, his family will continue to receive the full salary until they are capable of securing their livelihood.

In spite of Nigerian growing population still Nigeria was left behind when it comes to insurance. The global insurance market ranking shows that, the current Nigeria position in global insurance market was 64th and 4th in Africa with market capitalization of about N200bn ($1.62bn).

In many of the African countries like Nigeria and other developing countries insurance is less than 100 years old, and it was just of recent that the reinsurance practice of reinsurance started to be taken so serious.

The first insurance company to have a full branch office in Nigeria was the Royal Exchange Assurance (REA) of London in 1923. Before then, insurance companies which were mainly British, only had agencies. Many of the insurance companies in these days are foreign companies usually based in Europe who’s only write insurance through its individual agents in the country.

African reinsurance corporation was established in 1976 and the agreement establishing the African reinsurance corporation which commenced in 1978, Nigeria as a “member state shall undertake to guarantee? upon the entry into force of this agreement, that all insurance and reinsurance establishments operating in its territory shall offer to place with the corporation a minimum of five percent of each of their reinsurance treaties, both present and future including life treaties at terms accorded to most favored reinsurances (Chapter vi, Article 27: Forms of Cession).

J. O. Irukwu in his publication (1981) stated that “all the insurance companies operating in Nigeria are required by law to cede twenty percent of their business by way of legal cessions to the Nigerian Reinsurance Corporation. The present legislation governing the insurance operations in Nigeria is the Insurance Decree which came into force on the first of December, 1976?. He further argued that the insurance industry in Nigeria will grow tremendously in the future.

L. P. Boul (1977) reported that “Nigeria as of then enjoyed a well managed, reputable market internationally. In fact, it was the largest insurance market in Africa, with an annual premium income of N250, 000,000 according to 1976 estimates? but now it increase to over NGN 716,000,000 according to sigma report 2006.

Evidence had now shown that Insurance premium rose to 25% in 2008 and perhaps 30% in 2009. It was also expected to rise to NGN 6,000bn ($45bn) by 2020, but in the meantime, Nigerian government is expecting the insurance premium growth of NGN1,100bn ($8.36bn) before the end of 2012.

The recent capital base set by the Government of Nigeria for the life insurance was NGN2.5bn and NGN3bn for general insurance companies as their minimum paid-up capital with increase of over 1200% increase, while reinsurance companies were required to increase their minimum paid up capital to NGN10 billion. Although this suppose to be seen as an opportunity that could enable local players to compete internationally but remains a critical decisions for many business owner. (Bashorun, 2003; Ladipo-Ajayi, 2005).

This issue of recapitalization drivers many insurance companies in Nigeria to adopted merger and acquisition in order to meet the required target, after the M&A 71 strong companies emerged. This process of recapitalization was not a bad idea for the industry but rather will make the industry to be strong and be able to pay the claims.

Nigeria has the biggest insurance market in Africa but the weakness within the industry caused large insurance business to be written by some foreign companies including oil and Gas, Marine and aviation. Some of the major problems affecting the industry include; religious believe, ignorance as well as lack of confidence in the insurance industry among the members of public. Many of the multinational companies (i.e. shells corporation and total plc) operating in Nigeria insured their companies’ overseas due to the lack of confidence in Insurance companies in Nigeria. At the moment less than 10% of the population was actually insured and over 70% of vehicles in Nigeria were not properly insured while in some developing countries over 40-50% were insured and 80-90% in most developed countries.

Mr. Fola Daniel a Commissioner for Insurance, National Insurance Commission (Naicom) in his keynote address at two-day summit on insurance industry in Nigeria April 2008, stated that People are now becoming more literate and many know the advantages of insurance but the question is, how to sell the concept and then deliver on the promise? As for the religion he said “religion is no barrier – because of the success of specialized schemes such as Takaful insurance aimed at the Muslim population was proof of that?. He further urged the insurance companies to change in their culture and practice as well as their attitudes towards the customers, in order to achieve that he pointed out that "a major shift in corporate governance is vital, Management must be based on knowledge and integrity and Firms must remember that premium payments are monies held in trust, not operational profits!"

The issue of culture and religious as well as illiteracy (lack of awareness) on Insurance are some of the major factors affecting the insurance industry in Nigeria. There are over 120million Muslims in Nigeria which covers about 75% of Nigerian population and the majority of them are of the view that modern insurance is completely against the teachings of Islam.


This section will delve into the nature, scope and role of insurance to the economy as a whole.

Insurance as define by Pritchett, et al (1996), is a social device in which a group of individuals (called “Insured’s?) transfer risks to another party (called the “Insurer?) in order to combine loss experiences, which permits statistical prediction of losses and provides for payment of losses from fund contributed (premiums) by all members who transferred risk.


For a proper understanding of insurance business, one must come to terms with some key elements in which the business is either based upon or rotates around, such elements are discussed below. They will hopefully give a concise knowledge of insurance in general.

The Law of Averages or Large Numbers

Insurance is based upon the law of averages which states, in a nutshell that “although one cannot predict the chances of the actual occurrence of one particular result of an experiment out of a number of results on the basis of just one experiment, the relative chances of that particular result arising can be determined from a large number of experiments. This gives the measure of probability of the incidence of a particular result during one experiment? (M.N Siddiqi, 1985).

Siddiqi (1985), further explained that the law is based on averages which is not affected by any increase or decrease in numbers to the experiments. It has been found that the accuracy in which one can predict the probability of the occurrence of certain incidence over a period of time through this method is astounding.

M.N Siddiqi (1985) however, showed that there is always room left for error, for nothing can be perfect. This error can however, be reduced to an insignificant figure through the help of the “theory of probability which finally makes the computations and formulations still more valuable, reliable and fruitful?.

When one talks of probability, he or she is talking about statistics. At this point we must state that “the value of statistics in all classes of insurance cannot be overemphasized. It is the duty of the statistics section to supply the underwriters with necessary evidence to assist them in deciding whether or not to keep or decline a particular risk, depending on the claims experience (experiments). Methods of keeping statistics vary from company to company, but in all cases the aim is to make it possible for the desired information to be accurate and readily accessible? (J.O Irukwu, 1981). This shows that the statistics section is a vital part of the insurance industry and it works on the law of average or probability.

In marine insurance “particular averages? are applied to cargoes. “Particular averages? means the partial loss caused by peril insured against in contradistinction to general average and total loss as defined by the Nigerian Insurance Act of 1977.

General average on the other hand ‘implies some voluntary sacrifice of property made, or extra-ordinary expenditure incurred, at a time of peril threatening the old property involved in a common maritime adventure, with a view to preserving it from that peril, and embodies the principle that when such a sacrifice has been made, or expenditure incurred, the old property preserved shall contribute to the loss sustained, or the expenditure incurred as the case may be? (F. Templeman and C.T. Greenace, 1973).

In the statistics section of an insurance company there is what is called “the actuary?. J.O Irukwu (1971) states that the Concise Oxford Dictionary defines an actuary as “an expert in theory and practice of statistics especially of mortality, sickness, retirement and unemployment?.

Irukwu (1975) explained that in the life department, the actuary is concerned with the application of probability and statistics and the theory of compound interest to the practical problems of life assurance. His responsibilities further include; the calculation of premiums, evaluation of life fund and various reserves, surrender values, forecasting of financial results on long range and short range basis and advising the insurance company generally on investments and other technical bases of running the life programme successfully.

Risk and Uncertainties

From most of the definitions we have understood that insurance is based on risk management. It is important at this juncture to distinguish between various kinds of risks and also to determine which kind of risk insurance is based upon, because some risks are insurable while other are not.

W. A Dinsdale (1970). Argued that “not all risks are insurable: because they do not conform to the principles on which insurance is based?. Insurable risk is that which is measurable or calculable. This is called ‘pure risk’. It is this kind of risk that insurance is concerned with.

There is another class of risk called business risk and uncertainty which is not insurable. We shall first start with:

Business Risks and Uncertainties

This kind of risk is the risk that is encountered in everyday decisions or activities of businessmen. The price that a commodity will fetch in the market tomorrow is a risk in itself, because one has no certainty that the price or the commodity will incur a loss or a gain, and the producer has no way of telling exactly, the amount of loss or gain.

This calculation (of loss or gain) may turn out right or wrong, and he will earn profit or incur loss accordingly. The amount of gain or loss cannot however, be calculated in definite terms at the time of production of the article. This is an example of pure economic uncertainty, which is the basis of the modern theory of profit (M.N Siddiqi, 1985).

This kind of risk is a two-way phenomenon either loss or gain and it is characterized by uncertainty where nothing is known, therefore such risk is not insurable.

Pure Risk

On the other hand this kind of risk is a one-way phenomenon, where the only outcome is ‘loss’. In this kind of risk experience and scientific devices can make one certain of the probability of the incidence of loss through accidents or other perils. Take an example of a ship meeting with an accident during voyages as given by M.N Siddiqi (1985) where he states that “on the basis of data about shipwrecks collected from observation of the movements of hundreds of thousands of ships, spread over a sufficiently long period of time, it is possible to work out an average which may serve as the measure of probability of a ship meeting with an accident?.

Unlike business risk and uncertainty, one can see that pure risk is not calculated on mere guess work or speculation, but on solid scientific principles and facts, like the law of probability. This risk is measurable and thus the concern of the business of insurance.


Islam and Insurance as a Social Security System

Insurance is considered as a basic human need which provides relief to the victim of catastrophes and other social contingencies, these contingency may be biological; such as sudden death, sickness, disability as a result of injury at work, it can also be economical such as unemployment or natural disaster such as storm, fire and flood. This caused the economic efficiency of the victims to damage to the extent that they had to depend on other to fulfill their basic needs.

According to Siddiqi M.N (1981) “This reality requires that insurance be treated as a basic human need over a very wide range of human activities and situations?.

Most writers on Islamic insurance view it in the light of social security that is within the context of social security in Islam. So an attempt at defining social security will give us an insight into the subject matter (Islamic Insurance).

Social security can be define as a tool that “aims at relieving the deprived and the destitute of want and misery so that not a single member of the society remains un-provided in his basic needs i.e. food, clothing, shelter, medicine and education? (Siddiqi M.N 1981). This is an aspect of welfare and it aims at providing the maximum livelihood to all which is called the “maximum criterion? maximizing the welfare of the minimum. It was reported that Holy Prophet Muhammad (PBUH) advised to “help one another in furthering virtue and God consciousness and do not help another in furthering evil and enmity?. Another Hadiths also stated that Holy Prophet told a Bedouin Arab, who left his camel unchained to the will of Allah, “tie the camel and then leave it to the will of Allah?.

In view of these and other similar hadiths, it is established that concept of insurance does not contradict with Shariah. (Khandia, Abdur Rahman 2003). The hadiths clearly shows that as long as the form of insurance are based on mutual responsibility and co-operation and does not involve any evil or enmity, then it’s in lined with shariah.

However Siddiqi M.N further stated that “public welfare and social security is the foremost economic obligation of an Islamic state?. Also it’s the obligation of an Islamic state to bridge the gap cause by the misdistribution of wealth among the society and also to effect its economic development. This principle of social security require that each needy should be given relief regardless of what causes the destitution.

Insurance can be viewed Islamically, in the light of social security like zakat. Zakat is one of the five pillars of Islam meaning “the right of the have-not in the property or wealth of have or state? as long as there is no interference with the right of have or the state. This well established concept within the Islamic society obliged the rich to help the destitute and the unfortunate (W Jean Kwon 2007).

While “The purpose of zakat was to provide assistance to those who lack the basic necessities of life? (Aly Khorshid 2004). The Insurance takes care of the risks to which life and property are exposed. Furthermore, insurance in its purest form will protect the disruption of a system by accidents and events beyond human control. This view is held by Kashir and M. N. Siddiqi (1981). In view of the above discussion we can clearly see that insurance can be viewed in the context of social security in Islam.

Origin of Islamic social security

Social security was said to be in practice long before the coming of Islam, whereby families, relative or tribal member throughout the Arab territory form a fund which will saved as mean of helping needy on a voluntary and charitable basis. These practices were validated by Holy Prophet (PBUH) and incorporated into the institutions of the early Islamic State in Arabia around 650 Christian eras A.D.

Examples of these early Islamic practices include the following (Hailey College of Banking & Finance):

Merchants of Mecca used to formed funds to assist victims of natural disasters or hazards of trade journeys.

Surety called Daman khatr al-tariq was placed on traders against losses suffered during a journey due to hazards on trade routes.

Assistance was provided to captives and the families of murder victims through a grouping known as a'qila.

Contracts, called 'aqd muwalat, were entered into for bringing about an end to mutual amity or revenge.

Confederation was brought about by means of a hilf, or an agreement for mutual assistance among people.

From the Islamic point of view social security is a divine scheme derived from the two sources; Qur’an and Sunnah (traditions and teachings of the Holy Prophet Muhammad (PBUH)) which can be dated back to more than 1,400 years ago. As shown by A.L Buhari (1973). The principle embedded in these two sources can be broadly classified into the following (El-Sheikh 1987):

Protection of Human life (prohibition of destruction of human life whether it is His/her own or someone else’s).

Protection of human intellect (e.g. prohibition of intoxication).

Protection of human property (condemning misleading with one’s wealth as well as someone else’s such as gambling).

Protection human honor (condemning activities destroying families or promoting violence).

Protection human conscience (freedom of religion and worship or against imposing any faith or dogma on human beings).

The above fundamental principles, provides that one must find ways and means of avoid catastrophes and disasters wherever possible, and also to minimize the financial losses of himself or his family's should such events occur. And the possible way of doing so was to purchase an insurance cover as in the conventional system (Muhammad Ayub).

In order to fully understand these principles and also to relate them into Islamic insurance, firstly we need to examine what and what is Halal (lawful) and Haram (unlawful) according to the teaching of Islam.

It is in light of the above and need for real insurance cover, Islamic jurists (scholar) viewed Insurance as permissible, as long as it does not involve any form of Riba (usury), Gharar (uncertainty) and Maisir (gambling). They further concluded by saying that insurance in Islam should conform with principles of mutuality and co-operation.

Permissibility of Insurance in Islam

Writers have discussed on the permissible of insurance in Islam and the forms, they have made comparisons between conventional and Islamic insurance system. Opinion is sharply divided on the place of insurance in Islam. Before going deeply into reviewing of some literature on Islamic insurance, we intend to start with the arguments of some Islamic jurist regarding permissibility of insurance in Islam. Is Insurance permissible in Islam? And also, how will Insurance be organized according to Islam?

This question of whether insurance is permissible in Islam or how to organize it islamically was in existence for a very long time and many writers’ tries to answer this important question according to their understanding. Some viewed it as gambling or breach of Divine providence while others consider it as prohibited “Gharar? transaction. Salahi, Adil stated on Arab New March (1990), that “It appears that the persons following Islam object to insurance due to lack of understanding what insurance really is and what it does. He further stated that when we know that life insurance is nothing but an honorable way of looking after orphans, widows, the aged and the infirm, we would be sure that no religion does ever stand between those who need it and all that it does?.

There are some Islamic jurist (scholars or Ulamah) who find an element of gambling in all kinds of insurance as a matter of principle. They also find some other objectionable features such as Riba (usury), and Garrah (uncertainty) inalienably associated with insurance. Because of the involvement these elements of Gambling, Riba and Gharrah in insurance, an overwhelming majority of the Islamic Jurists are on the opinion that the conventional insurance contract does not in its present form conform to the Islamic Shariah and regard it as an “unnecessary innovation?. Amongst these Ulamah (scholars) are: Sheikh Bakeet (355:72), Abdullahi Al-Qalqeeli (365), Mustafa Zaid (597:376), Mufti Muhammad Shafi (351), Jalal Mustapha Al-Sayyad and Shaukat Ali Khan (M.N Siddiqi, 1981).

On the contrary, many writers believe otherwise. They do not find Riba and uncertainty inalienably associated with insurance such writers are M.N Siddiqi (1981) and (1985), M.A Mannan (1975). However M.N Siddiqi (1985) maintains that insurance and gambling are basically different from each other, and that Islam is not inherently opposed to the idea of covering calculable risks (insurance). From an Islamic view point the present forms of insurance suffers from certain evils but are not inherent to the principles of insurance as such. This statement is also supported by the resolution of the first conference of Islamic Economics (1976) see chapter one.

Siddiqi (1981) added that several writers see nothing wrong in insurance as far as the basic principles are concerned. It is free from gambling, can be freed from interest and the ‘jahl’ (ignorance) and ‘gharar’ (uncertainty) in it are not of a degree large enough to call for its prohibition. These writers include Zarga, Yousuf Mousa, Ali Al-Kaseef, Mahmoud Al-Baby, Sanousi, Roohani, Tahawi, Taqi AMini Sheikh Mahmoud Ahmad, M.A Mannan, Shaheedi, Anwad and Siddiqi himself.

M.A Mannan (1975) ruled that there is no provision in Islam that prohibits one from providing for the maintenance of his dependants. Insurance companies, by covering ones risks and uncertainties ensures provision for his dependants because insurance is a forced saving he further points out that it is Allah’s will that no individual should be bereft of the reasonable means of existence and should be immunes from any and every encroachment, this objective is the supreme duty of the Islamic state.

The views of the majority of the Islamic jurist, the logic in their arguments for Islamic insurance and finally the resolution of the first Islamic Economic Conference, Makkah 1976, has since resolved the controversy. The position finally stands that insurance is in principles permissible in Islam. According to the jurist this concept of insurance is acceptable in Islam because (Hailey College of Banking & Finance):

The policyholders would cooperate among themselves for their common good.

Every policyholder would pay his subscription in order to assist those of them who need assistance.

It falls under the donation contract which is intended to divide losses and spread liability according to the community pooling system.

The element of uncertainty will be eliminated insofar as subscription and compensation are concerned.

It does not aim at deriving advantage at the cost of other individuals.

Siddiqi (1985), Mannan (1975) and a host of others however, have contributed significantly in showing how insurance can be organized under an Islamic system in such a manner that, purified from all Islamically incompatible elements, it can become a blessing to the society.


This will include the composition and basic functions of the underwriting department of insurance which will help shine some light on how to organize Islamic insurance.

At this stage it is important to understand what is reinsurance and not its importance to the insurance industry.


Reinsurance, called reassurance in the life department is a step taken by insurance companies to ensure that risks in excess of the company’s retentions are spread by way of the automatic treaty reinsurer who automatically takes over any amount in excess of direct insurers retentions, according to J.O Irukwu (1985).

He further explained that retentions are influenced and determined by the company concerned. He gave an example of a company with a substantial capital and sizeable fund resources. It would retain more business for itself and therefore, reinsure less than a comparatively new and small company with a small capital and limited resources.

Basically, reinsurance is a kind of inter-insurance relationship and mostly international relationship concerning the ceding company and Reinsurance Company.

There is an agreement that established an African Reinsurance Corporation which commenced in 1978 (made in 1977). It is established under the Organization of African Unity (OAU) and serves the purpose of fostering the development of the insurance and reinsurance industry in Africa, to promote growth or national, regional and sub-regional underwriting and retention capacities to support African economic development. This is contained in article 3 chapter III of the Agreement.

Amongst the functions of the corporation, is transacting reinsurance business through treaty and facultative cessions in respect of all or some classes of insurance inside as well as outside African (Article of the Agreement).

As already stated in section 2.1 of this chapter, Nigerian insurance companies cede a minimum of five percent to the African Reinsurance Corporation according to Chapter VI, article 27 of the Agreement.

Compositions and Functions of the Underwriting Department

This will give us an idea of how to organize Islamic insurance.

Traditionally, the business of insurance, according to J.O Irukwu (1985), is organized under four departments, namely; life, marine department, accident and fire departments. In practice however, some departments such as accident for example are further divided into sections with sectional heads. Accidents in some companies in Africa are divided into separate departments, for example, burglary, road as well as general accident departments.

Irukwu (1985) further shows that some small companies in Africa simply organize their insurance as follows:

Life Department: which handles all ordinary life and group life business (volume of this business is far less than non-life).

Non-Life Department: Handling all branches of non-life business.

Claims department: handling claims emanating from all departments, and

An agency or marketing department.

He further showed that a typical, composite and fairly large insurance company would organize insurance under the following departments:

Life department: with all the appropriate sections as indicated below.

Non-Life Departments as follows: fire, marine, accidents and motor (vehicle) as well as service and general departments such as the reinsurance department, the agency or marketing departments and an accounts department.

The large or more sophistical insurance companies have a marketing development department and a public relations department.

For Islamic insurance the importance of a public relations department cannot be overemphasized.

Islamic insurance have now become popular in many part of the world including non-Muslims countries like America, UK and Europe, as it is today Islamic insurance global market was said to be estimated at $2.1 billion as at 2001 and it has been growing at more than 15% per annum since 2000. As of 2006 in Middle east alone Islamic insurance generate $6.9 billion in premium income, it was also expected to grow to be worth $14 billion by the year 2015 despite the global financial turmoil, according to the latest Swiss Re’s report.

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