Indonesia

Protecting Indonesia from Natural Disasters and Health Crises through Risk Finance, Insurance Programs

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Earthquakes and tsunamis. Volcanic eruptions, mass flooding and landslides. Many countries are faced with one of these disasters at one time or another. Indonesia, however, faces all of them frequently.

Located within the Pacific “Ring of Fire, 76 out of the 147 volcanoes in Indonesia are active, making the country one of the most disaster-prone places in the world.

Earthquakes can strike across the approximately 5,100-kilometer archipelago at any time. Landslides have frequently occurred across Java, Indonesia’s largest island population and other major regions. In recent years, tsunamis have crashed onto the shores of North Sumatra, Sulawesi and West Java.

For decades, official government policy was limited to response and recovery after the disasters occurred. Such shocks and disasters have become constant threats to Indonesia's development progress. The cost from disasters continues to impact central and subnational government finances adversely.

A recent analysis found that between 2014 and 2018, the central government spent between US$90 million and US$500 million annually on disaster response and recovery, and subnational governments spent an estimated additional $250 million during the same period. This means, between 1.4 and 1.9 percent of total spending by central government agencies and ministries over this period was related to natural disasters - two to four times more than the Ministry of Finance had estimated.

Support to protect Indonesia’s budget and assets

In recent years, the Ministry of Finance has strengthened its strategy and approach to expand beyond physical recovery and reconstruction to the proactive financial management of disasters.

In October 2018, Indonesia hosted a high-level international dialogue during the Annual Meetings of the World Bank Group and International Monetary Fund in Bali. The country unveiled its national Disaster Risk Finance and Insurance (DRFI) Strategy

"Throughout the years, the government has relied solely on the state budget to cover the cost of disasters. It poses a risk to the budget allocated for other priority sectors such as education, health, and to programs of subnational governments," said Sri Mulyani Indrawati, Indonesian Finance Minister, during the launch of the DRFI strategy.

The World Bank has closely partnered with the Indonesian government to develop the DRFI and continues working together in its implementation.

The strategy’s key goals are:

  • protect the state budget through a dedicated mechanism to efficiently manage central government disaster expenditures
  • strengthen central-regional fiscal coordination through clear roles and responsibilities for financing disaster response
  • protect state assets through an indemnity insurance program to cover all agencies and ministries
  • protect households and the poor, for example, through adaptive social safety net programs
  • strengthen DRFI coordination through training and dissemination of the strategy among related institutions.

"Throughout the years, the government has relied solely on the state budget to cover the cost of disasters. It poses a risk to the budget allocated for other priority sectors such as education, health, and to programs of subnational governments"

Sri Mulyani Indrawati

Minister of Finance

In January 2021, the World Bank approved a US$500 million lending operation to support Indonesia’s efforts to build and strengthen its financial response to natural disasters, climate risks, and health-related shocks such as the COVID-19 pandemic. It supports the government to establish a Pooling Fund for Disasters. Created in August 2021 through a Presidential Regulation, the Pooling Fund serves as a central mechanism that will help ensure effective and transparent flow of money to relevant government agencies, including faster social assistance payments for victims of disasters, and improve preparedness planning.

Over time, the Pooling fund will leverage domestic and international insurance and capital markets to increase its financial capacity. The lending operation will also invest in activities to improve planning, such as introducing budget tracking for disaster-related expenditures.

A US $14 million grant from the Global Risk Financing Facility (GRiF) is co-financing the efforts to help build the government’s technical capacity in managing the fund to protect the most vulnerable groups.

Another key component of the World Bank’s ongoing collaboration with Ministry of Finance on DRFI is implementing and scaling the government’s State Asset Insurance Program. Since its launch in 2019, the insurance program has covered more than 3,300 buildings of 28 ministries as of June 2021.

Work is also underway toward integrating Indonesia’s efforts with the Southeast Asia Disaster Risk Insurance Facility (www.seadrif.org), which has financial protection of public assets as the next priority product. Indonesia is already a member of the Facility, with neighbors across ASEAN, including the Philippines and Vietnam, where similar work is ongoing.

Like natural disasters, Indonesia’s DRFI Strategy is likely to endure. Establishing a disaster pooling fund and expanding insurance coverage of state assets and infrastructure could help the Indonesia face disasters without disrupting its development progress.