Insurance-backed loans propel financial resilience among communities

Some of the farmers who have benefitted from the One Acre Fund loan rest outside a Tupande duka seed and fertiliser collection point. [Courtesy]

Embedding insurance into loans has the potential to boost financial resiliency among communities across the country.

A report by a pan-African Insurtech in partnership with One Acre Fund indicates that such insurance-backed loans also play a key role in the improvement of healthcare access for the unbanked population while simultaneously de-risking lending portfolios.

In the report that examined insured loans to smallholder farmers across the country, Turaco and One Acre Fund gave borrowers the option to embed insurance into its loans to protect against health emergencies that can impact repayment.

Ted Pantone, Turaco CEO and founder said financial outcomes were notable among the insured group with 65 per cent of borrowers self-reporting that their loan repayments are a lesser burden and 63 per cent reporting reduced stress levels, as they spent less time worrying about money.

He said given that insurance was optional, there are likely systematic differences between the insured and uninsured groups like wealth and previous exposure to insurance; that could influence financial outcomes.

“There's a potential decrease in default; initial results indicate up to 60 per cent lower default among the group that chose to add insurance and 18 per cent increase in on-time loan repayment times among that group,” he said.

According to the report, these significant and encouraging findings highlight the need for additional research that can further expand on the likely causal relationship between insurance and loan repayments.

The report notes beyond financial resilience, borrowers reported a marked improvement in health and overall well-being with an increased health visit of 66 per cent.

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

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, putting 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.

Pantone said, “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”.

He said by embedding insurance into loans, both borrowers and lenders are protected.

“We are dedicated to improving the financial resilience of low-income families, and helping lenders get repaid is a key way to get that done.”

His sentiments were echoed by One Acre Fund’s Director of Product Strategy Hepsiba Chepng’eno said they remain committed to the mission of helping boost food security and build pathways to prosperity among the 50 million farm families in sub-Saharan Africa

“We believe that farming is the engine of Africa's development. By integrating insurance into our loans, we allow smallholder farmers to focus on growing their crops without the fear of getting derailed by unexpected medical bills,” he said.