Policy#7: Is Insurance setting the economy on FIRE?

Policy:

It is illegal to sell insurance contracts, where the insured person will pay monthly premiums to an insurer who will pay out a sum of money in the event of death, accident or other specified circumstances. Instead, it is the responsibility of society or the state to take care of the affairs of people. For example, if there is a natural disaster, then the State would be required to tax, call for donations or tax the rich to cover the need.  

Proofs

In Islam, insurance is forbidden because a contract must offer a tangible benefit such as a service (e.g., medical, house cleaning, etc.) or a product (e.g., shoes, cars, software, etc.). Insurance does not fulfill this requirement as it is, in reality, an exchanging of money between parties based on the occurrence of certain events. Consequently, since it is missing this aspect of a contract – which is mandatory in all such agreements in Islam – it is an illegitimate contract. 

Islam does, however, allow for providing a guarantee where the guarantor (Dhaamin) joins his responsibility (Dhimma) to the responsibility of the person guaranteed for (Madhmoon ‘Anhu) in committing oneself to a certain right (Haqq). For example, someone can agree to pay someone else’s debt, should the “insuree” be unable to pay his or her debt. However, this “insurance” must be provided for free, as in you can’t charge for it. The evidence for that is what Abu Dawud narrated from Jabir who said:

“The Prophet would not pray over any person who died while indebted. A dead man was brought. He  said: ‘Is he indebted?’ They said: ‘Yes, two dinars.’ He  said: ‘Pray for your companion.’ Abu Qatadah al-Ansari said: ‘O Messenger of Allah, they are upon me.’

The Messenger of Allah (saw)  then prayed over him. When Allah opened the land (i.e., conquests in Jihad) for the Messenger of Allah, he said: ‘I am more entitled to (i.e., responsible for) every believer than his own soul. So if anyone leaves a debt it is upon me to repay, and whoever leaves wealth it is for his inheritors.”

A condition of the guarantee’s validity is that it should be regarding a liability that has been contracted. So if the pledge was not in respect to a pre-existing financial obligation, the guarantee is not valid.

Capitalist Propaganda

An excellent example of the rationale, or propaganda, for insurance can be found here:

“Insurance is also a valuable risk-financing tool. Few organizations have the reserves or funds necessary to take on all risk themselves and pay the total costs following a loss. Purchasing insurance, however, is not a complete risk management plan.”

Although honest, it is only so from the Capitalist paradigm. The reality is that it is not the best way for a society to manage risk. In fact, it is quite problematic.

counter-Propaganda:

Insurance is an individualistic approach to risk: Insurance is sold to manage one’s personal risk by arranging for someone else to bear it should the catastrophe arise. This is quintessential Capitalism. They see the issue of risk as an individualistic concept and use the wrong definition of society that maintains society just consists of individuals. So when disaster strikes – it’s the “devil take the hindmost” concept, which is a fancy way of saying that those without the means to protect themselves should simply perish.

A societal approach to risk management: Another way to think of risk is to think of society in its reality: like a human body has unique parts but a shared destiny; the hand won't do so well if the head goes missing. And so when a disaster strikes, the State can use the taxes its collected to help those devastated by the wildfire, tornado, etc. If the State doesn’t have any money, it can ask for voluntary donations to help those in need. If that is insufficient, then it must tax the wealthy. For example, when famine struck Madinah in 18AH, the Caliph, Umar bin al-Khattab (ra), set-up tents around Madinah to house and feed those adversely affected by the famine. He also sent for food from Egypt and Sham; thereby enabling the more prosperous provinces to help those hard done by.

What’s interesting about those two approaches is they are not that different in certain ways. In both scenarios, the wealth is being stored somewhere, someone in a centralized bureaucracy decides who gets what, and then the money is distributed to those people. The difference is, however, on the terms it happens. In Capitalism, a for-profit-enterprise will payout to some of the insured. Those who were "insured" but are not paid and the uninsured are "left to the devil", thereby fulfilling the maxim “devil take the hindmost”. The Islamic approach, in contrast, requires the State to ensure that all those affected by the calamity are taken care of.

Points to Consider:

Profiting of people’s misery is a bad idea: Insurance it's actually quite cruel when you break it down. To sell insurance you to create anxiety in the society about the insurance. Then when a disaster, like Hurricane Katrina, strikes, they need to ways of getting out of paying the victim - thereby really causing the insured anxiety.  Consequently, insurance inevitably results in death and mayhem. Aetna was slapped with a $25.5M judgment that had to be paid to Ron Cunningham whose wife had brain cancer. The funding she sought was denied by the insurance company. As a result, she never got the treatment. Unfortunately, she died. When you look at this story, you scream to yourself ‘let the damn money go and save the woman's life!' But that's what freedom means: the freedom of ownership of Aetna’s shareholder’s outweighed the life and limb of those insured by the company.

This type of injustice is not limited to medical insurance. Katrina victims who had paid for insurance were denied payouts. The judge ruled that the insurance companies were not on the hook for flood damage but only wind damage. Imagine the frustration of the people who thought they were covered, but in reality, they weren't.

More recently, insurance companies are refusing to renew coverage for Californians who live in “high-risk” fire zones. And why wouldn’t they? They have no responsibility to help people - they are in it for the money. And that’s the root problem. For-profit-enterprises are not designed to address our well-being. This is the job of the ruler, which must take care of people and be held accountable for this task.

Riskensteins are inevitable: Like the Frankenstein monster (an abnormal assembly of human body parts), insurance companies are riskensteins. Why? Because they are an abnormal accumulation of risk.

We saw this big time with the $85 billion AIG bailout in the Financial Crisis. The company had no way of covering the insurance policies - credit default swaps - they issued. As reported in the NY Times, “If A.I.G. had collapsed — and been unable to pay all of its insurance claims — institutional investors around the world would have been instantly forced to reappraise the value of those securities, and that in turn would have reduced their own capital and the value of their own debt. Small investors, including anyone who owned money market funds with A.I.G. securities, could have been hurt, too. And some insurance policyholders were worried, even though they have some protections.”

The AIG fiasco illustrates a fundamental flaw in the insurance model: it requires humans to predict the future. Remember how Alan Greenspan revealed this reality when he washed his hands of any wrongdoing for the Financial Crisis? He blamed his failure on not being God:

"We cannot expect perfection in any area where forecasting is required. We have to do our best but not expect infallibility or omniscience“. In other words, all the models in the world can't, won't predict the future because there is no god but Allah and humans can't know the future (Alan Greenspan or otherwise). In other words, all the models in the world won’t predict the future because there is no god but Allah and humans can’t know the future (Alan Greenspan or otherwise). Instead, such costs can only be known after the fact. Therefore, it is only then the funds should be collected and distributed appropriately.

Insurance is an economic FIRE hazard: Insurance is the “I” in the so-called FIRE economy: Finance, Insurance, and Real Estate. The FIRE takeover of the economy results on a focus the trading of paper instead of real goods and services. Interest could be the worst - as it can outgrow planet earth let alone the productive yield of the economy. Perhaps the biggest illustration of this is how Sony makes 63% of its operating profits from finance with “[l]ife insurance has been its biggest moneymaker over the last decade, earning the company 933 billion yen ($9.07 billion)”. So even Sony - the inventor of the Walkman - is not focused on the production of goods and services but focuses on such paper wealth.

Before iPods, iPhones, there was…

The issue here is that insurance is part of the imaginary economy that is based on, at the end of the day, nothing. It's a way for the billionaires to extort payments from the masses. It is well known, for example, that for warranties to be issued on a profitable basis, the consumer must lose.

Is insurance return to feudalism? Insurance is indisputably an ideological manifestation of Capitalism. However, when it is fused with an enforcement apparatus of the state, it feels more like feudalism. Remember how we learned in school the feudal lords would take the wealth of the serfs who worked their land? Mandatory (car) insurance is similar: the state is working to enforce a for-profit contract - where the shareholder is now playing the role of the feudal lord. And we are playing the role of serfs: paying a pretty penny to the shareholders.

A little harsh?

According to “economics professor Fred Lazar, of York University’s Schulich School of Business, suggests insurers might have raked in approximately $5 billion in pre-tax income from 2011-2016, including an estimated $1.5 billion in 2016. Those 2016 profits represent an estimated 60 percent increase over those from 2011.” If you can check the video in the above link here, you can see how the professor is less than optimistic that the regulators can do anything about this extortion racket.

Also, certain companies in the title insurance industry were being targeted by New York State for corruption. According to the state's governor: "title insurance companies paid for lavish meals and entertainment on the dime of consumers, which inflated premiums."

What these two cases illustrate is that the insurance companies are not selling a product because there are no costs of goods sold. Instead, such corruption demonstrates how the model is open to conflicts of interest.  The insurance companies can always argue that they need additional premiums to cover payouts when they are either engorging themselves or their shareholders. 

To add insult to injury, when the REAL disaster strikes there will be so much demand that the insurance companies will likely have insufficient funds to cover the actual need (e.g. like what happened with AIG during the financial crisis) causing them to go to the State treasury: thereby allowing the costs to be socialized, while the profits remain privatized.