TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
Alternative schemes for disaster risk financing
Indonesia could be one of the world’s five biggest economies by 2045, some experts predict
Change Size
I
ndonesia could be one of the world’s five biggest economies by 2045, some experts predict. Yet one obvious constraint is that the country’s geography means it has a high risk of natural disasters. Tsunamis, floods, earthquakes and forest fires are some of the most common calamities to have struck Indonesia in the last decade, with the potential to cause wider poverty and economic slowdown.
According to the National Disaster Management Agency (BNPB), the losses from the Aceh earthquake and tsunami in December 2004 might seem relatively small compared to the nation’s gross domestic product (GDP) of around 0.3 percent, but it accounted for a significant 30-45 percent of the provincial GDP. Total state losses from natural disasters in 2004-2014 increased a massive Rp 240 trillion (US$17.54 billion).
The BNPB reported that the central government allocates Rp 4 trillion every year as a contingency fund for disaster recovery. Each province also allocates a budget of Rp 1-15 billion every year to disaster recovery.
Depending on the frequency and severity of the disaster, this amount can sometimes exceed need, but other times it may fall far short of the amount needed for recovery, let alone reconstruction.
The 2018 disaster budget was far than sufficient, given the massive disasters of the earthquake and tsunami in Palu, Central Sulawesi, and the earthquake in Lombok, West Nusa Tenggara.
Former director Irfa Ampri of the Center for Regional and Bilateral Policy, which falls under the Finance Ministry’s Fiscal Policy Agency, said last year that Indonesia needed a variety of financial instruments and funding channels apart from the state budget for disaster recovery to mitigate fiscal risks.
The government thus established in 2018 a disaster risk finance and insurance strategy. The strategy has two key points: transferring and retaining risk.
Risks that can be transferred include household insurance and state asset insurance, while the retention risk strategy involves contingency liabilities, funding pools and budget allocations.
In 2019, the government established state asset insurance and a funding pool withRp1 trillion in secured funds. However, the government has not yet published details of the funding pool scheme.
_______
If Indonesia were a human body, the entire body would feel pain when disaster strikes any particular part.
_______
Similar funding pools have been implemented in several countries and regions around the globe. David Simmons, managing director of capital science and policy practice at Willis Towers Watson, a multinational risk management, insurance brokerage and advisory company, said that the Mutualized Disaster Insurance Facility (MDIF) was a scheme that helped its members cope with natural disasters.
The MDIF is provided through a specially created insurance company that is fully or partially supported by donors. Its benefits include lower premiums, greater budgetary certainty, greater ownership, greater sustainability and greater collaboration.
The fund’s management usually involves policyholder representatives, government representatives, insurance experts and disaster hazard experts. The scope of the MDIF can be on a national or regional level.
Examples of national MDIFs include Mexico’s Natural Disasters Fund (FONDEN), and the Philippines Catastrophe
Disaster Insurance Pool (PCDIP), while examples of regional MDIFs include the Caribbean Catastrophe Risk Insurance Facility (CCRIF), the African Union’s African Risk Capacity (ARC) and the Southeast Asia Disaster Risk Insurance Facility (SEADRIF).
The CCRIF is the world’s first multicountry risk pool and was founded in 2007. It offers parametric insurance and gives member governments a unique opportunity to purchase disaster coverage for earthquakes, hurricanes and excess rainfall at the lowest possible pricing.
The CCRIF is a special purpose insurance company owned by a trust that benefits members by sharing risks in the Caribbean. Funded by donors and protected by reinsurance, the CCRIF has provided more than 60 payments totaling $160 million over 12 years to 14 countries, all within 14 days.
Inspired by the CCRIF, the ARC is a hybrid mutual insurance company that aims to assist African governments build capacity to better plan, prepare and respond to extreme weather events and natural disasters.
Focusing on drought-affected populations, the scheme comprises the African Risk Capacity Agency and the ARC Insurance Company Limited.
They work hand-in-hand to provide ARC member states with capacity building services and access to state-of-the-art early warning technology, contingency planning, risk pooling and transfer facilities.
FONDEN was established in Mexico 20 years ago for rapid infrastructure rehabilitation after a disaster.
It builds on an interinstitutional framework that requires collaboration between federal ministries and affected state governments, providing a mixed indemnity-parametric insurance.
It also maintains two budget accounts for reconstruction and prevention.
The primary budget is for reconstruction, which includes trust funds that hold cash for reconstruction, emergency relief and recovery, and may purchase insurance and other risk transfer mechanisms.
The secondary budget is for prevention, including risk assessment and reduction, capacity building and compulsory risk assessment.
In the Philippines, the PCDIP is a government-owned entity that complements that country’s disaster insurance initiatives and its management board comprises city representatives. It offers parametric insurance for wind, earthquake and later, floods, from which its municipal members can choose the coverage they most need.
Meanwhile, the SEADRIF is a regional platform that provides participating nations with advisory and financial services to increase preparedness, resilience and cooperation in response to climate and disaster risks in Southeast Asia.
In conclusion, an MDIF can take the form of a mutual insurance company like ARC, a company owned by a trust or foundation like the CCRIF and SEADRIF, a state-owned insurer such as the PCDIP, or a special government-managed entity like FONDEN.
The advantages that an MDIF scheme can offer Indonesia is cost effectiveness, local government involvement, a complement to existing mechanisms and building risk ownership, cohesion and solidarity through knowledge sharing.
In forming this entity, Indonesia can replicate and/or adjust the above schemes to fit our needs and governance characteristics as a vast archipelago. As a unitary state comprising 34 provinces, if Indonesia were a human body, the entire body would feel pain when disaster strikes any particular part.
Given the economic disparity among the country’s regions, central and regional governments need to collaborate and work in synergy to create the most appropriate MDIF for Indonesia.
__________
Employee at the Center for Regional and Bilateral Policy, Fiscal Policy Agency, Finance Ministry. The views expressed are his own.
