Does the insurance consist of the Riba which is prohibited strictly in the Quran?
Dr. M. Najatullah Siddiqui’s views provide a guide-line to get a satisfactory answer. He writes in ‘Insurance – in Islamic Economics‘, pages 36 to 41, that (translated from Urdu):
The insurance companies, for the sake of engaging the accumulated sum of the premiums, invest in the securities, which are safe, guaranteed as well as profitable. They do not invest in the share market. If there is any possibil-ity of getting added profit on the investment without involving the interest, the insurance system can be purified from the interest.

If the premiums are only accumulated but not invested, it is not only damaging to the national resources and developments but also the cost of the premium will have to be too high. Therefore, it is a must to engage the sum of the premiums.
The important question is that how to utilise the capital sum of the insurance in an interest-free venture? This question is critical to the private insurance companies but not for the state controlled companies. It is possible for the state to invest the large sums with guaranteed safety as well as profitability. We suggest that in an Islamic system, the insurance should be a part of the economic activity and remain in the hands of the government. In an interest free economy, the private insurance companies too will be able to buy the shares from the government or from the big enterprises. They can deposit the amounts in the Government controlled banks which are free from the risks of loss. In this case, it will be easy to calculate the profit ratio that will be helpful to fix the amount of premium.

As Dr. Md. Najatullah Siddiqui stresses that “In an Islamic system, the insurance should be a part of the economic activity and remain in the hands of the government“, life insurance in India is constitutionally in the hands of the state although it is not an Islamic country. This could be an example to the Islamic countries that how Dr. Najatullah Siddiqui’s suggestion has a great wisdom.

Further he says:
The interest is fixed in the market but it cannot be fixed in an interest-free system. The interest rate will have to be assumed only. But, we should not forget that, the interest rates in the common market too are always changing. The insurance companies do take note of the probable changes and fix the premiums accordingly. It is a must as the interest rate may differ from time to time but the amount of premium cannot be changed once it is fixed in the contract.
It is possible that the profit generated from the investment is greater than expected at the time of calculation of the premium. A Reserve fund can be established from the surplus profit so that it can be reserved for any probable loss. More premium too will not have to be demanded to compensate if the loss occurs in a particular year. This will help also to keep the premium fixed for many years and it will not affect the profit ratio.

Sometimes it is said that interest is an integral part of the insurance as the insured is promised to be paid excessive amount at the time of maturity of the policy. The basis of this assumption is that “every addition or increment is Riba”. This is a baseless assumption. The Shariah does not declare every addition as Riba. The premium is not a loan as such that it is returned with addition to the capital amount. Virtually, the premium is a kind of contribution or donation which is paid for uplifting and collectively benefitting the society. Not only in the state governed insurance organisations but also in the private sector, the form of premium is not that of a loan but of a contribu-tion. The premium can be regarded as a price of a service which is subjected to the need.

Another difference, as analysed by Dr. M.Najatullah Siddiqui between the interest and the insurance is that in the interest based loans, the period and the total value is fixed, but in the insurance, the insurance claim is irrespective of the total amount paid by the policyholder and the period of the premiums he pays. If an accident takes place, the claim is paid irrespective of both i.e. the total amount and period by the time of accident. The total value of the claim depends upon the actual financial loss. In some cases like life, ship, etc. the total value of the loss is predetermined but in the general insurance, like fire, the loss can not be predetermined unless it takes place.

It is true that the price of a life can not be fixed. The decision is left on the discretion of the person himself depending upon his capacity to pay the premium. In any case, it is baseless to assert that the insurance is interest just because something additional to the paid premiums is received by the insured.

In the true sense of the insurance, i.e. in its mutual organisation the same amount received in the form of premiums is paid back to the group collectively. It is neither less nor more. Because, the premium is calculated on the basis of the law of average or law of large numbers keeping in view the compensation of the whole group, not of an individual only. It is possible that the amount paid by an individual is less or more than he received, but collectively the amount paid and received by the whole group remains same.

The administration expenses too are a major factor in the insurance calculations. If the admin expenses are included, the amount paid by the insurance holders is more than they receive. But, on the other hand, due to the profit from the investment of the premiums, the amount received by the insured is more than they pay. This addition due to the profit is calculated in advance, hence only, comparatively, less amount of premium is collected from the policy holder. Therefore, the insurance is totally different from the interest. In the loans of interest, the payee, whether it is an individual or a group, has to pay more than what it receives but in the insurance, collectively, the amount paid and received back will remain same. The case may be different individually but not collectively.