In a traditional insurance plan, the insured individual first sells his risk to a third party for a fee, adding a component of “gharar” (uncertainty) to the contract. In accordance with Shariah, a contract of uncertainty exists when the nature of the counter value being exchanged between the two parties is unknown. The insured person may have paid a premium and received nothing in return if a house does not burn down, in which case the insurer will incur significant financial losses. Third, traditional insurance does not provide reciprocal benefits since some people — like stockholders, for instance — benefit at the expense of others. Second, traditional insurers make investments in projects that pay interest or include other forms of activity, which is against Shariah rules. In other words, commercial insurance firms are in business to protect their shareholders, not their clients. Finally, the guiding idea underlying business insurance is that it is based mostly on commercial concerns. On the other side, takaful is governed by the idea of greater welfare for everybody, which strives to create a social structure built on universal brotherhood.

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