The World Bank has approved funding of $ 500 million for Indonesia to help the country improve its financial response to natural disasters, climate risks and health-related shocks, with the use of pooled funds. risks and insurance or reinsurance instruments at the heart of the plan. .
Between 2014 and 2018, Indonesia’s central government spent between $ 90 million and $ 500 million per year on disaster response and recovery, the World Bank said, while Indonesian local governments spent around $ 250 million. millions more over the same period.
With the cost of natural disasters and severe weather expected to continue to rise due to climate change and urban growth, the World Bank notes that these costs will put pressure on Indonesian government public spending.
Add to that the added pressure from the COVID-19 pandemic and it’s clear that risk financing and risk shifting to remove some of these fiscal and financial pressures would benefit Indonesia in the future.
A new World Bank project aims to support the Indonesian government’s national disaster risk financing and insurance strategy, with the $ 500 million loan to finance a significant amount of works.
The aim is to strengthen Indonesia’s fiscal and financial resilience by establishing a disaster risk pool, which will be supported by insurance and reinsurance instruments from international markets.
Commenting on the World Bank loan grant, Sri Mulyani Indrawati, Minister of Finance of the Republic of Indonesia said: “Financial preparedness for disasters, climate shocks and health crises such as COVID-19 is more more important for Indonesia. This support will help the government provide a more targeted and timely response, reducing the impact of disasters and helping to protect Indonesia’s development progress.
The World Bank project will finance the Disaster Pooled Fund, which in the future will use a range of financial instruments to ensure that it has sufficient resources to pay for disasters.
These are likely to include insurance and reinsurance market-based instruments, but also pre-arranged financial market instruments that can provide conditional sources of capacity.
The risk pool “will leverage the domestic and international insurance and reinsurance markets to support a more effective disaster response by providing financial capacity to sustain the fund in years of severe disaster and building on on the expertise and technology to manage payments, ”the World Bank said, while the precise financial instruments to use are still undecided.
This is where catastrophe bonds and the transfer of insurance or reinsurance risks to the financial markets come in, as a viable option to secure the capacity needed to support the catastrophe risk pooling mechanism. Indonesia.
The World Bank’s strategy for this project in Indonesia is as follows: “Identify contingent liabilities in advance, pre-arrange a combination of financial solutions, including leveraging financial markets, establish clear rules for managing finances. public funds for the use of these resources and link these funds to clear disbursement channels. so that they effectively reach beneficiaries. “
While the amount of insurance and reinsurance protection that Indonesia’s new risk pool will need is not yet clear, the World Bank believes that “markets should play a catalytic role in expanding coverage. protection over time. ”
This likely includes capital markets, which is again the subject of Catastrophic Bond as a potential risk transfer mechanism that could ensure the capacity to sustain Indonesia’s disaster risk pool in such a way. effective.
As the Indonesian government seeks to build on its National Disaster Risk Insurance and Finance (DRFI) strategy, with this risk pooling initiative seen as a key element, the use of risk transfer to financial markets should play an important role.
The purchase of insurance or reinsurance protection for the Indonesia Catastrophe Risk Finance Pool, which will channel capital to support the risk pool initiative, is seen as vital to its durability.
The issue of Cat Bonds and the transfer of catastrophe risks to financial markets has already been addressed and the Indonesian government has already had discussions on the use of Cat Bonds as a tool for financing disaster risk.
Importantly, the World Bank sets its goals for how disaster risk capital would be used, which is essential for such a project.
Saying that an “efficient and transparent” flow of funds is essential to ensure that the money gets to the right people and the right places quickly after a disaster.
All this to say that access to effective forms of capital, using structures that can be triggered transparently and quickly in the event of a disaster, should put catastrophe bond at the heart of discussions to protect ease of implementation. common risk of Indonesia once it is operational.
Satu Kahkonen, World Bank Country Director for Indonesia and Timor-Leste, said: “Improving the availability and flow of funds will ultimately support the people of Indonesia who will benefit from a faster response. and better targeted to disasters and health shocks. This will particularly benefit the poorest and most vulnerable, who are most affected by the delay in responding to disasters and often lose their livelihoods and income, keeping them in poverty. “