Islamic Insurance — practice questions

Correct answer: A. Clauses 2 and 3: Islamic insurance is an agreement among a group of persons to handle injuries from specific risks to which all are exposed, through contributions paid as donations, establishing a fund with legal personality and independent financial liability, from which participants are indemnified. Conventional insurance is a Mu’awadah (commutative) contract seeking profit from the insurance operation itself and is therefore affected by Gharar and prohibited. Investing premiums in Shari’ah-compliant assets does not change the commutative nature of conventional cover.

Correct answer: C. Clauses 3/1, 3/2, 5/5 and 10/3: The managing company is entitled to its capital and the returns on it, the agency (Wakalah) fee, and its share of profits from investing the insurance assets through Mudarabah (or a fee under investment agency), and it bears its own operating and investment expenses, including pre-operating expenses. The policyholders’ fund is entitled to the contributions and their returns, insurance provisions and reserves, and the surplus; the company has no share in the surplus, and reserves go to charity on liquidation (Clause 5/6).

Correct answer: B. Clause 4: There are three contractual relationships in Islamic insurance: a Musharakah among the participants establishing the company or fund (Clause 4/1); a Wakalah relationship between the company and the fund for management, and Mudarabah or investment agency for investing the fund’s assets (Clause 4/2); and, between the policyholders and the fund, a commitment of donation at the stage of making contributions and a commitment of indemnification at the stage of compensating injury under the regulations (Clause 4/3).