AAOIFI Shari’ah Standard on Islamic Insurance


This Standard covers Islamic Insurance in terms of its definition, Shari’ah status, characteristics, principles, basic elements, types, and how it differs from Conventional Insurance. The Standard also sets out the controls to be observed by the Islamic financial Institutions offering products based on Islamic insurance. However, it does not cover social insurance schemes arranged by the state.

Definition of Islamic Insurance in Contrast with Conventional Insurance Islamic Insurance is a process of agreement among a group of persons to handle the injuries resulting from specific risks to which all of them are vulnerable. A process, thus initiated, involves payment of contributions as donations, and leads to the establishment of an insurance fund that enjoys the status of a legal entity and has independent financial liability.

The resources of this fund are used to indemnify any participant who encounters injury, subject to a specific set of rules and a given process of documentation. The fund is managed by either a selected group of policyholders, or a joint stock company that manages the insurance operations and invests the assets of the fund, against a specific fee.

As for Conventional Insurance, it is a Mu’awadah (mutual compensation) contract that seeks to make profit out of the insurance operation itself, and, hence, is subject to Shari’ah rulings on financial dealings that involve Gharar (uncertainty). Consequently, conventional insurance is banned by Shari’ah.

The full text of AAOIFI Shari’ah Standards is available here.