Insurance-backed loans boost financial resilience, report

Small Scale Farmers in Esumeya Village in Kakamega County benefited from farm inputs through the One Acre Fund. [File, Standard]

The default rate on insurance-backed loans across the country is 60 per cent lower than on non-insured loans, a new report has revealed.

The report by Turaco in partnership with One Acre Fund shows that embedding insurance into loans boosts financial resiliency and improves healthcare access for the unbanked population while simultaneously de-risking lending portfolios.

The report examined insured loans to smallholder farmers in Kenya.

Partnering with Turaco, One Acre Fund gave borrowers the option to embed insurance into its loans to protect against health emergencies that can impact repayment. The financial outcomes were notable among the insured group.

According to the report, lenders reported that their loan repayments were less burdensome, with a 65 per cent decrease, coupled with a 60 per cent reduction in default rates and an 18 per cent extension in loan repayment times.

“Beyond financial resilience, borrowers saw a marked improvement in health and overall well-being. Borrowers reported that their health visits increased by 66 per cent,” read part of the report.

There was nearly an even breakdown in the utilisation of claim payouts among medical expenses (37 per cent), household expenses (36 per cent) and repaying family and friends for healthcare costs (31 per cent), illustrating the flexibility of insurance to cover immediate expenses borrowers face in light of a financial shock.

Additionally, 63 per cent of borrowers reported reduced stress levels, as they spent less time worrying about money.

Turaco CEO and founder Ted Pantone said with 85 per cent of jobs found in the informal sector in sub-Saharan Africa, the vast majority of adults lack access to employer-based insurance and must pay out-of-pocket for healthcare expenses.

This he said puts them at risk of financial ruin due to costly medical bills.

According to the World Health Organization, 14 million low-income households across the continent are plunged into poverty every year due to out-of-pocket health expenses.

With 70 per cent of One Acre Fund borrowers previously lacking access to insurance, 47 per cent would have had to sell an asset to cover hospitalization costs.

“Without insurance, families across Africa are vulnerable to devastating catastrophic health risks, which can ruin them financially. This also puts lenders at greater risk of loan defaults. By embedding insurance into loans, both borrowers and lenders are protected,” said Pantone.

He said the firm is dedicated to improving the financial resilience of low-income families, and helping lenders get repaid.

Hepsiba Chepng’eno, One Acre Fund’s Director of Product Strategy said by integrating insurance into their loans, they allow smallholder farmers to focus on growing their crops without the fear of getting derailed by unexpected medical bills.

“At One Acre Fund, we believe that farming is the engine of Africa's development. We are on a mission to help boost food security and build pathways to prosperity among the 50 million farm families in sub-Saharan Africa,” said Chepng’eno.