Using Insurance Instruments to Improve Disaster Risk Finance in Indonesia

Abstract

This paper is an overview of how insurance instruments could be used in Indonesia to improve disaster risk finance (the arrangements for managing the financial consequences of disaster). We review the policy and research literature to describe the existing arrangements in Indonesia for preparing for and responding to disasters, including the efforts of an active Indonesian community mapping movement to fill in some of the major gaps in data that hinder the assessment of disaster risks. We argue that as a large geographically diverse middle-income country, Indonesia is well placed to employ insurance instruments for fairer and more predictable sharing of the financial burden of disasters. This could be through a combination of increased private insurance for households, firms and government agencies across the country and insurance-based arrangements for allocating government disaster relief funding and, when required for the largest high impact events, accessing international resources. This will, however, require careful implementation and a sustained effort to address gaps in data, skills and institutional capacity.

Keywords: Captive insurance, catastrophe insurance, catastrophe modelling, community mapping, disaster planning, economic capital, flooding, insurance, loss distribution, loss simulation, disasters, spatial data infrastructures, risk transfer instruments, transaction costs

JEL Classification: G22, H80, H84, Q54