In 2018 alone, 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. As articulated in Law 24/2007 on Disaster Management, the required funds for post disaster financing can be divided to three categories: (1) emergency responses funding; (2) funding for recovery programs, and; (3) funding for reconstruction of public infrastructure and financial aid for the reconstruction of community housing (World Bank, 2011). One of the main issue in regards to disaster funding based on the three categories of funding needs articulated by Law 24/2007 is the substantial need to fund the reconstruction of community housing since many reports stated that the funding needed for housing reconstruction are greater than the funding needs for the reconstruction of health facilities, roads, and schools (World Bank, 2011).
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. Therefore, insurance enables those impacted from disasters to receive quick disbursement of funds. In Indonesia, a major insurance gap still exist 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. Insurance opens the way for affordable premium payment to avoid massive loss in the future (Grossi, 2005). Risk transfer in the form of insurance also help lessen the risk towards public financial stability and economic development, and contribute towards the certainty of budget appropriation.
The existing insurance gap in Indonesia signifies that there's still much room for research activities to be done to properly address the role of insurance in financing post-disaster reconstruction and rehabilitation. This research also critically address 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. This research will also correlate with a number of existing regulations and laws which regulates disaster risk financing, such Government Regulation 22/2007 on Financing and Management of Natural Disasters.
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