Disaster Risk Financing and Insurance
About Disaster Risk Financing and Insurance
The escalating financial losses caused by disasters have posed significant challenges for governments worldwide. These shocks affect vulnerable communities, small and medium-sized enterprises (MSMEs), and businesses, creating budget volatility and fiscal risks. In response to this growing concern, the Disaster Risk Financing and Insurance (DRFI) program has emerged to provide financial protection to populations in the face of disasters. DRFI is an integral part of disaster management plans, aiming to establish a financial safety net capable of addressing the extensive damages incurred during disasters. Its primary objective is to ensure timely and sufficient funding for response and recovery efforts while also promoting resilience-building and risk-reduction measures.
DRFI encompasses various strategies and financial instruments designed to manage the costs associated with natural hazards, including earthquakes, floods, hurricanes, wildfires, and pandemics. These instruments include publicly issued disaster risk financing instruments, such as contingency funds. While these funds are valuable, they should not be solely relied upon, as governments are often financially overburdened.
Hence, insurance plays a pivotal role in DRFI, encouraging governments, businesses, and individuals to purchase policies that cover losses incurred during disasters. Common types of insurance in DRFI include property insurance, crop insurance, and catastrophe bonds. Risk transfer mechanisms, such as reinsurance and catastrophe bonds, are also crucial components of DRFI. These mechanisms enable the transfer of some or all of the risk associated with disasters to financial markets, diversifying the risk burden.
Collaboration between the public and private sectors is essential in DRFI, as it helps share the financial burden. Risk pools, such as the ‘Pooling Fund for Disasters’ (Pooling Fund Bencana, PFB), gather contributions from multiple entities into a common fund, which can then be used to cover disaster-related losses. This approach spreads the financial burden, reducing the impact on individual policyholders and taxpayers. Both Indonesia and the Association of Southeast Asian Nations (ASEAN) have adopted DRFI strategies, including national PFB and SEADRIF, as well as ADRFI to ensure reliable funding for disaster responses. By 2023, these initiatives have amassed significant funds to support disaster management.
Despite these efforts, DRFI mechanisms still face challenges related to national readiness and inclusive insurance. Issues include unsustainable subsidy schemes, low insurance literacy and inclusion, affordability concerns, and a preference for conventional insurance. These challenges are not unique to Indonesia but extend to the broader Southeast Asian region.
RDI contributed to various works on DRFI at the national and regional (ASEAN) level through RDI teams and key RDI fellows. To name a few, one of RDI’s key fellows, Dr. Saut, analyzed Indonesia’s DRFI landscape and developed a diagnostic of existing opportunities, constraints, and challenges for Indonesia in achieving DRFI. The RDI team, led by Dr Saut also analyzed the DRFI landscape in the ASEAN Member States, as part of a study commissioned by the ASEAN Socio-Cultural Communities, recently, RDI was also tasked to develop strategies to finance Adaptive Social Protection by integrating them with DRFI. There are other works related to DRFI by RDI, making us the leading think tank working on this topic in Indonesia and ASEAN.