The idea of insurable interest is one of the key issues that has been dealt with in the insurance industry ever since the notion of insurance was adopted in society, Although the practice of Takaful has been in existence as an alternative to insurance from the late 20th century, the issue of insurable interest in Takaful practice has not yet been resolved. This is perhaps due to the diversified confusing issues that haunt scholars and practitioners alike in the field of Takaful.
This article attempts an analysis of the existing provisions laid down under the Malaysian Insurance Act 1996; considers whether insurable interest could be possibly adopted in the contemporary Takaful practice; and, if not, what a Shariah alternative solution to the issue of insurable interest could be, which would suit the reality of Takaful operations.
Existing provision laid down under section 152 of the Insurance Act 1996
“1. A policy insuring the life of anyone other than the person effecting the insurance, or the life of a person mentioned in subsection (2), shall be void unless the person effecting the insurance has an insurable interest in that life effecting at the time the insurance is effected and the policy moneys payable or where the policy moneys are payable in installments the discounted value of all future installments under the life policy, shall not exceed the amount of that insurable interest at the time the event resulting in payment of policy moneys occurs.
2. A person shall be deemed to have insurable interest in relation to another person if that other person is:
- his spouse, child or ward being under the age of majority at that time the insurance is effected;
- his employee; or
- notwithstanding paragraph (a), a person on whom he is at time the insurance is effected, wholly or partly, dependent.”
Can the above provision be applied in Takaful operations? An analysis
The provision provided under section 152 of the Insurance Act 1996 on the issue of insurable interest may not be applicable in Takaful operations due to the following reasons:
- There is less security for the life of the insured (spouse, child, ward, employee, etc), as this may give an opportunity to the participant to gain something through using the life of another.
- It contravenes the provisions relating to hibah (gift) and wasiyah (will).
- The ownership of the benefit of the policy is uncertain (gharar). A transaction which involves the element of gharar is unlawful in Islamic law, as ruled in the Prophetic sanction:
“Reported by Said Ibn al-Musayyib (ra): Verily the Holy Prophet (saw) forbade from an uncertain transaction.” (Muwatta al-Malik)
Proposed alternative for Takaful operation: a procedural highlight
A Takaful certificate insuring the property or life of anyone other than the property or person effecting the Takaful shall be void unless the property or the person effecting the Takaful has an insurable interest legally, morally or spiritually in that property or life at the time the Takaful is effected.
- If a person holds a Takaful certificate on his own legitimate property, the certificate holder shall have an insurable interest on his property should the defined risk occur on the property, and the certificate benefit shall be payable to the certificate holder.
- If a person holds a Takaful certificate on his own life, he himself shall have an insurable interest on his own life should the defined risk occur on him, and the certificate benefit shall be distributed, in the case of his death, according to the principles of faraid; but if he is still alive, the benefit of the certificate shall be payable to him.
- If a person holds a Takaful certificate on a life other than himself or on public property which is used for noble causes (i.e. mosque, madrabah, rehabilitation center, orphans’ house, old folks center, refugees’ center, animal welfare center, etc), the Takaful certificate holder shall have no insurable interest despite the fact that the payment of contribution has been made by himself. The expected benefit over the payment of contribution in this situation shall be treated as either hibah, wasiyah, waqf or sadaqah, in which the insurable interest shall remain with the person or the property on whom the certificate was bought.
If a person wishes to insure his own life or property by a Takaful certificate against a defined risk, it is his legitimate right to do so. In the Islamic Shariah, if anyone takes the initiative to protect himself or his property from being affected by an unpredicted but defined risk, it is by all means encouraged, as enshrined in the following Hadith:
Narrated by Anas bin Malik (ra), the Holy Prophet (saw) told a Bedouin Arab who left his camel untied trusting to the will of Allah: “Tie the camel first and then leave it to Allah.” (Al- Tirmizi)
From this Hadith it can be concluded that it is better to take an initiative for protection before a risk occurs.
However, if a person holds a Takaful certificate on a person other than himself or on a property with the intention of exercising the right of insurable interest on the life of another or on his disowned property, it is like gaining something by using the life of others or property. This is not tolerated in the teaching of the Shariah and may be justified by the Quranic sanction where Allah warned mankind not to gain wealth in vanities. Allah said to this effect:
“O you who believe, eat not up your property among yourself in vanities, but let there be amongst you traffic and trade by mutual good will.” (Surah an-Nisa, 4-29)
If, however, a person wishes to hold a Takaful certificate on the life of others or on public property used for noble causes, the contributions paid by the certificate holder shall be treated as a sadaqah or hibah or wasiyah or waqf in favor of the person or the property on whom the certificate has been bought. In other words, the participant shall not have any insurable interest in the above situation, but the only person or property on whom the certificate has been bought shall have an insurable interest from the certificate against the defined risk. In this situation, the contribution paid is on the basis of moral or spiritual obligation, whereby the payer can expect only benefit rewarded by Allah for his contribution to noble causes.
This may be justified by the Ahadith of the Rasulullah (saw), which provides that the donor should not take back his donation, nor should he take any benefit from the donation. The Holy Prophet (saw) said to this effect:
“lbn Abbas (ra) reported that the Messenger of Allah said: He who takes his gift donation back is like a dog which takes back its vomitings. There is no evil smile for us.” (Mishkatul Masabih)
“Ibn Umar (ra) and Ibn Abbas (ra) reported that the Messenger of Allah said: It is not lawful for a man to give gift and afterwards to take it back. The parable of one who gives a gift and then takes it back is like the parable of a dog which eats till when it is satisfied, it vomits and then takes his vomiting back.” (Mishkatul Masabih)
It is submitted here that, although the existing modern provisions effecting insurable interest may not be justified for the Takaful market, this does not mean that the entire idea of insurable interest should be rejected. As it is understood that the issue of insurable interest is essential to sustain the consequential benefits of the scheme, therefore Shariah justified insurable interest should be designed to ensure that Takaful operations function with meaningful spirit.
The author is Islamic Corporate Advisor on Shariah
Compliance of Banking, Finance, Investment, Takaful, re-Takaful, Business, Wealth, Asset and Property Management, Capital Market, Bond (Sukuk) Market, Money Market and e-Commerce. He is a Professor of Islamic Finance at the Faculty of Islamic Finance, University of Camden, USA (Malaysian Center). He can be contacted by email on: [email protected]; website: http//.www.applied-islamicfinance.com.
References are available on request from the author.