Indonesia’s gegraphical position is located in between three tectonic world plates; Eurasia, Indo-Australia, and the Pacific Plate. This location made Indonesia highly prone towards seismic and volcanic activities. During the 21st Century, Indonesia has been severely affected by major earthquakes such as the 9.1 magnitude 2009 Aceh earthquake, and the 7.6 magnitude Padang earthquake in 2009. In 2018 alone, there have been three major geological disasters (e.g. Central Sulawesi, Lombok, and West Java earthquakes) which have caused over 3,000 fatalities, greatly weakened the local economy, and drained the state financial resources. During the 2018 Annual World Bank International Monetary Fund Meeting, the Ministry of Finance; Sri Mulyani previously stated that Indonesia has allocated 4 trillion Rupiah for contingency funding, only less than a fifth of the average losses incurred by all categories of natural disasters, which has accumulated up to IDR 22.8 trillion in average per-year. This condition was often worsened by the high dependancy of local governments to budgets from the central government. This major gap in disaster financing has resulted in state budget deficit and budget allocations from other sectors may cause a slowdown in other areas of development. The state budget also has its limits, and the local government is still very dependent on the national budget. This financing gap reflected the need for alternative instruments to be used in order to ease the financial burden of disaster impacts to the state budget. Despite the effectiveness of ‘risk retention’ strategy (e.g. through contingency funds) for managing the impact of high frequency, low severity disasters such as floods, landslides, etc.—risk management through the use of ‘risk transfer’ methods (e.g. housing insurance and state asset insurance) is more effective for dealing with low frequency but high severity disaster events such as volcanic eruptions, earthquakes, and tsunamis.
According to the World Bank – GFDRR Disaster Risk Management Framework, disaster risk financing is categorised as the fourth pillar of the framework titled: “Financial Protection”. This pillar specifically address the increment of financial resilience of governments, private sector, and households through financial protection strategies. This strategy then include four broad categories of disaster financing instruments, mainly; sovereign disaster risk financing, property catastrophe risk insurance, agricultural insurance, and disaster-linked social protection. Categorisation of disaster risk financing instruments can also be done based on ex-post, and ex-ante financing. While ex-post financing policies are less effective than ex-ante financing due to its tendency to make governments orientate towards being dependent on foreign donor support, external credits (e.g. loans, bond issue), and the re-allocation of national or subnational budgets, which often hindered governments from providing timely financial assistance for disaster victims. As disaster risk financing issues gained prominence, more emphasis are put towards ex-ante financing. This includes setting proper strategies and mechanisms on: insurance utilisation (parametric or index-based), contingent debt facility (e.g. CAT DDO), and alternative risk transfer tools (e.g. CAT bonds). These efforts are being done prominently in developing countries where funding for relief and reconstruction are unable to fully rely on taxation catchments and private risk financing arrangements. Alternatively, middle and low-income countries relies strongly on ex-post borrowing and assistance from international donors. Particularly in Indonesia, the topic of disaster risk financing is understudied—but constantly gaining traction as disasters are increasing in intensity and potential losses are expected to continuously increase. To fill in this knowledge gap, RDI is developing a research group and knowledge hub focused on disaster risk financing and its instruments.