Indonesia increases its insurance coverage for natural disasters

 

On a global scale, Indonesia is a country with one of the highest disaster rates. The archipelagic nation is situated on the infamous Pacific Ring of Fire, which lies around the Pacific Ocean and wherein volcanic eruptions and earthquakes frequently occur. As such, the country is subjected to frequent natural disasters such as flooding, earthquake, landslides, tsunamis, volcanic eruptions and cyclones. On average there were 289 natural disasters annually between 1989 and 2019, directly and indirectly resulting in approximately 8000 deaths each year. Furthermore, the consequences of climate change – such as rising sea levels and erratic weather conditions – constitute a threat to the country’s economic development, in particular for lower income groups and people whose livelihoods depend on soil or sea.

The Global Facility for Disaster Reduction and Recovery, overseen by the World Bank, indicates that climate change may lead to increased uncertainty and disruption in water availability, food production, transport, commerce and urban development. 2018 was Indonesia’s deadliest year in a decade, with approximately 4231 deaths caused by earthquakes and tsunamis, and the incidence of natural disasters is expected to remain high in the coming years. In fact, the National Board for Disaster Management (BNPB) has predicted that at least 2500 natural disasters will hit Indonesia in 2019.

From 2000 to 2016, losses caused by natural disasters averaged roughly Rp22.8trn ($1.6bn) annually, but government response spending reached just Rp3.1trn ($219.8m), or approximately 10% of required funds for response.

Market Limitations

Overall, insurance penetration remains relatively low in Indonesia, and it is particularly low for disaster-related products like earthquake protection. This problem is not limited to Indonesia. Other disaster-prone Asian nations such as Bangladesh and the Philippines also display low levels of penetration and awareness. In addition, a lack of catastrophe insurance exacerbates the economic and social impact of natural disasters. Following a disaster event, uninsured asset losses must be paid from government or development funds. This can constitute a major problem for governments of emerging economies that are already struggling to balance debt obligations with delivering public services and infrastructure developments.

The primary cause of inadequate insurance coverage arises from a perceived high price of these policies as compared to their benefits. However, the problem continues to be aggravated by a general lack of trust in the insurance industry and limited understanding of policies overall.

Projects & Policy

In 2004 a tsunami hit the Indonesian coast, prompting a turning point for the government, which began to establish various disaster risk management measures, including a 2007 law on disaster risk management. However, international agencies have continuously criticised the government for its lack of preparedness for natural hazards, specifically in regards to tsunamis. The devastating Sunda Strait tsunami in 2018 revealed just how far the country lagged behind other Asian nations in structures related to the building and maintaining of early warning systems.

Following 2018’s major earthquakes, Sri Mulyani Indrawati, the minister of finance, announced in October 2018 that a government natural disaster financing strategy and disaster risk insurance scheme would be introduced in 2019.

Previously, the government depended on the state budget and fiscal reallocations for natural hazard relief and reconstruction. If damage from these events exceeds the financial ceiling of the disaster fund allocation, the government budget could be overwhelmed, and in the worst case, there could be no reconstruction or recovery at all. The disaster financing strategy and risk insurance scheme are intended to cover government properties and to facilitate swift redevelopment in cases of damage, as well as help affected households and communities.

A special account opened at Bank Indonesia will help establish a pool system to supplement the state budget, and it is anticipated that a new government agency will be created to manage it. This move would limit bureaucracy, making action fund allocation after disasters swifter and more efficient. According to the minister of finance, a dialogue will be opened with private insurance companies and some of them will be included in the disaster risk financing model. Due to lack of support from the government, insurance companies do not usually cover recurring catastrophes such as floods. Therefore, enhanced cooperation between the private sector and the government could potentially translate into more efficient disaster management, and improve financial and protection instruments.

The government has indicated it will more than double its annual catastrophe response budget to Rp15trn ($1.1bn) in 2019. Of this, Rp5trn ($354.5m) will be allocated to rehabilitation and reconstruction, and Rp10trn ($709.1m) will be reserved for disaster response. Lastly, in order to boost its response budget, the government is considering issuing catastrophe bonds. These are high-risk derivatives that offer relatively high interest rates and strong returns if no disaster takes place. On the other end, if a natural hazard occurs and causes major losses, the government will secure the funds as insurance for recovery from that event.

Safeguarding Agriculture

According to the UN Food and Agriculture Organisation, half of the 4.3bn people living in Asia Pacific work in agriculture. The seasonal nature of agriculture means farmers do not earn an income until harvest, making it virtually impossible to stretch their income to cover emergencies caused by natural disaster. For nearly a decade, successive Indonesian governments have been working to find a plan to mitigate farmers’ risk and crop damages in cases of natural catastrophes. In 2013 a law was issued to protect and empower the country’s farmers, which stipulates that through agricultural insurance the central and local governments have the obligation to protect farmers from financial losses incurred due to harvest damage. For a total loss of crop, the government assists by providing payments in proportion to the number of hectares damaged. This budget is managed by the Ministry of Agriculture, and funds are released following requests from local governments .

Rural Coverage

In another example of the state providing insurance for rural communities, in 2017 the Coordinating Ministry for Maritime Affairs and Fisheries allocated Rp1.5bn ($106.4m) to protect shrimp farming from losses against flood, tsunami, earthquake and other accidents. Under the scheme, Rp37m ($2623) per ha would be paid to shrimp farmers on the island of Borneo who suffered losses due to natural hazards. Although both central and local governments have tried an array of localised initiatives to protect farming communities, the lack of a national scheme has left many farmers unprotected.

In order to address this, the government has begun a cooperation programme with reinsurance company Swiss Re and Japan International Cooperation Agency (JICA). In January 2019 a memorandum of understanding was signed in Jakarta, which seeks to strengthen the agricultural insurance system for rice crops in the country. Swiss Re and JICA will work with various Indonesian institutions to recommend policies that will improve the current agricultural insurance system. This programme is in line with the broader National Medium Term Development Plan, which was an initiative drafted by the government to cover the country from 2020 to 2024.

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The Report: Indonesia 2019

Insurance chapter from The Report: Indonesia 2019

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