The Mode of Payment of Insurance Premiums: Different Methods Compared

• Jurisdiction: South Africa
• Date: 25 May 2019
• Citation: (2011) 23 SA Merc LJ 64
• Author: W G Schulze
• Published date: 25 May 2019
• Pages: 64-81

The Mode of Payment of Insurance Premiums:

Different Methods Compared

WG SCHULZE*

University of South Africa

1 Introduction

It is trite that after cash, the electronic transfer of funds is fast becoming the

most popular method of paying debts.

By way of a general background to the present discussion, it is necessary to

distinguish between an electronic transfer of funds in the wide sense, on the

one hand, and, incorporated in it, an electronic transfer of funds in the narrow

sense, on the other hand.

An electronic transfer of funds in the wide sense includes all methods of

payment which involve some form of electronic intervention in the transfer of

funds from the debtor’s bank account to the account of the creditor. The

electronic transfer of funds in the wide sense would thus include payment by

means of debit and credit card, cheques, stop and debit orders, as well as the

electronic transfer of funds where no payment card or other document (for

example, a cheque or debit order form) is involved. In the case where there is

no payment card or other document involved in effecting the transfer of funds

from the debtor’s bank account to that of the creditor, one might conveniently

refer to such transfer as an electronic transfer of funds in the narrow sense.

This will be the case where the debtor, by means of an electronic device,

including a telephone or mobile banking facility, or a home computer, or an

automated teller machine (‘ATM’), keys in a password or a personal

identif‌ication number (‘PIN’), followed by a payment instruction to his bank’s

computer which is linked to the electronic device employed by the debtor. The

instruction given by the debtor to his bank would be to transfer a certain

amount from his account to that of the creditor.

The proliferation of electronic transfer transactions worldwide, and also in

South Africa, stands in stark contrast with the decline in the use of some of the

more conventional methods of payment, such as credit cards and cheques.

This phenomenon may be illustrated by the following statistics.

During 1999, there were 306 963 million electronic magnetic-tape

transactions in South Africa with a total value of R2 088 479 billion. These

f‌igures include all electronic transfers, such as electronic salary payments, and

all debit and credit transactions settled among banks, including debit orders

and client-initiated electronic transfer of funds, but excludes intra-bank

transactions. They are therefore not limited to electronic fund transfers in the

* BLC LLB (Pret) LLD (Unisa). Professor in the Department of Mercantile Law, School of Law,

University of South Africa.

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(2011) 23 SA Merc LJ 64

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conventional sense of the word. In the same year, a total of 280 644 million

cheques with a face value of R5 358 352 billion were processed by the

Automated Clearing Bureau (‘the ACB’).

1

During 2005, there were 532 225 million electronic magnetic-tape

transactions in South Africa with a total value of R2 986 988 billion, while in

the same year a total of 112 826 million cheques with a face value of R1 496

533 billion were processed by the ACB.

2

During 2010, there were 737 241 million electronic magnetic-tape

transactions in South Africa with a total value of R5 395 762 billion; in the

same year a total of 42 018 million cheques with a face value of R942671

billion were processed by the ACB.

3

However, at least one important branch of the commercial sphere has, to a

large extent, escaped the dominance of electronic fund transfers as the

preferred method of payment. That is the payment of insurance premiums.

Although insurance premiums are occasionally paid by way of a credit card,

cheque or a client-initiated electronic transfer of funds, the large majority of

insurance premiums are still paid by way of debit order.

There are a number of reasons to explain the continued importance of the

debit order as the preferred method of payment in the insurance industry.

Sufficeit to mention here that in most if not all methods of payment other than

the debit order, the creditor (here, the insurer) has to rely on the punctuality

and honesty of the debtor (here, the insured) to arrange for payment to take

place, for example, to post or deliver a cheque to the insurer; or to present a

stop order for payment to his (that is, the debtor’s) bank; or to effect an

electronic transfer of funds. However, in the case of a debit order the order is

completed and signed by the insured and handed over to the insurer. The

insurer therefore has greater control over the punctual payment of the

premium in the case of a debit order. Furthermore, a debit order makes

provision for a f‌luctuating amount, and is therefore ideally suited for those

situations where the insurer wants to increase the premium, for example,

where the contract provides for an annual increase in the amount of the

premium, or where the risk insured against increases and the insurer wishes to

charge a higher premium.

4

In this article I will explain in some detail the operation and legal nature of

four methods of payment that could be employed in paying an insurance

premium: stop orders;

5

debit orders;

6

cheques;

7

and the electronic transfer of

funds.

8

My discussion will further focus on the principles of South African

law which underlie the operation of these four methods of payment. Finally, I

1

See (Mar 2004) 231 South African Reserve Bank Quarterly Bulletin at S-13.

2

See (Mar 2011) 259 South African Reserve Bank Quarterly Bulletin at S-13.

3

Ibid.

4

See par 3.3 below.

5

See par 3.2 below.

6

See par 3.3 below.

7

See par 3.4 below.

8

See par 3.5 below.

MODE OF PAYMENT OF INSURANCE PREMIUMS 65

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