Indonesia looks to cat bonds after string of earthquakes & tsunami

Indonesia is to launch a new plan for disaster risk management, resilience and transfer, with catastrophe bonds eyed as one potential financing tool, as the country begins the recovery from a number of earthquakes and the recent devastating Sulawesi quake and tsunami.

A report from Reuters cites a minister who leads the fiscal policy unit of the financial ministry of the Indonesian government stating that the country wants to be better prepared and make use of the available financial tools to help mitigate the costs of disaster and aid with recovery.

Indonesia has been hit by a number of earthquakes in recent months, with the events that struck the island of Lombok and surrounding area in July and August now thought to have cost almost $800 million.

Last weeks Sulawesi earthquake and tsunami devastation for the city of Palu and the region surrounding it are expected to cost the country significantly more.

As a result, the Indonesian government expects to launch a new strategy to find disaster recovery, part of which could include the issuance and sale of catastrophe bonds, the report says.

Indonesia is hosting annual meetings of the International Monetary Fund (IMF) and the World Bank in Bali later this month and an announcement on the countries intentions to work towards disaster risk transfer and funding mechanisms may be announced it seems.

Suahasil Nazara, the Head of the Fiscal Policy Agency, Ministry of Finance, Indonesia, said that the country must work to ensure it has the capacity to respond to disaster.

Increasingly this is a message coming out of disaster prone regions of the world, where insurance, reinsurance and insurance-linked securities (ILS) techniques, structures and capacity could be put to work in transferring and financing disaster risks.

Nazara said that the Indonesian government would look to insure its state assets, then establish a disaster risk financing mechanism. The global insurance and reinsurance markets are likely to play a role in these efforts, but so too the capital markets.

Catastrophe bonds and the support of IMF and World Bank entities could help Indonesia to put in place a funding mechanism that provides liquidity immediately after disaster strike, while the insurance and reinsurance market could help the government protect its own balance-sheet and buffer taxpayers.

Nazara said the government could sell its own catastrophe bonds, but of course it’s much more likely that Indonesia could work with the World Bank to achieve this, at least in the first instance, or with a recognised domicile and with Singapore in the region this perhaps could be an interesting opportunity for the budding ILS market to make a difference for its neighbour.