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Addressing Disaster Insurance in Indonesia
Researcher: Dr. Saut Sagala, Dr. Heryal Anwar, Hengki Eko Putra, Ichsan Hafiz L, and Amesta Ramadhani
In 2018, Indonesia faces three major geological disasters (e.g. in Sulawesi, Lombok, and West Java earthquakes) consisting of earthquake and tsunamis. These major disaster events have caused over 3,000 loss of life, weakened the local economy, and drained the state financial resources. Indonesia is still currently dependent on risk retention strategy for disaster funding such as the annual allocation of funds. Needless to say, the state budget has its limits and the local government is still very dependent on the national budget. Despite the effectiveness of ‘risk retention’ strategy for managing the impact of high frequency, low severity disasters such as floods, landslides, etc. risk management through the use of ‘risk transfer’ method is more effective for dealing with low frequency but high severity disaster events such as volcanic eruptions, earthquakes, and tsunamis. One of the two main instruments of risk transfer is disaster insurance. Insurance is one of the pivotal ex-ante instruments for disaster financing. Insurance enables those impacted from disasters to receive quick disbursement of funds. In Indonesia, a major insurance gap still exists-the penetration percentage of general insurance which protects housing towards disaster risks only adds up to 5% (MAIPARK, 2017). Nevertheless, huge potential of insurance still existed for it to be used for funding disaster rehabilitation and reconstruction-since the use of insurance mechanism distributes the risk towards insurance or reinsurance companies through premium payment at a certain rate. Dr. Saut Sagala (RDI Senior Research Fellow), the late Dr. Herryal Zoelkarnaen Anwar (RDI Senior Research Fellow) and Mr. Hengki Eko Putra (RDI Affiliate) have successfully obtained research support from IRSA to conduct research on the role of insurance in financing post- disaster reconstruction and rehabilitation. The research also critically addresses the current state of implementation of Law 24/2007 on Disaster Management, especially on the aspect of funding for reconstruction of public infrastructure and financial aid for the reconstruction of community housing as articulated by Law 24/2007.