Islamic insurance is founded on a cooperative principle. Policyholder’s premiums are considered a donation from the general fund from which claims are met. At the end of the year, any remaining cash surplus (after deduction of expenses) is not kept by the company or its shareholders, but returned to the policyholders in the form of cash dividend or distributions.

Islamic insurance business is different from the conventional form, which the shareholders, rather than the policyholders, benefit from the profits generated by the sale of insurance products and services and by insurance investment assets.

Insurance investment assets which are represented by insurance funds that accumulate over the retained surpluses reserves, provision and so on are rewarded with percentage of the profit on these investments as distinct from the insurance business.

Islamic insurance is founded on the principle of separation between the funds and operations to the policyholders.

An area of major growth now is the Islamic alternative to the life insurance known as Takaful. This is fully compatible with Islamic principles. The Prophet [Peace be upon him] said: “It is better to leave your heirs rich than to leave them poor and needy asking others for help.” The main purpose of this form of insurance is to protect families from the financial hardship that may occur if the breadwinner goes unexpectedly or is permanently disabled as result of illness or accident. And, as governments in many parts of the world roll back the provision of state-funded welfare, Takaful covers play a growing part in providing security for the loved ones.

 

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