FloodFinJava was a research project at Loughborough University that ran from April 2018 to January 2020. It was a cross disciplinary and cross university collaboration between the School of Business and Economics, the Department of Geography and the School of Architecture, Building and Civil Engineering together with the Faculties of Engineering of Universitas Diponegro in Semarang, Central Java and Universitas Sebelas Maret in Solo, Central Java.
FloodFinJava was financed by National Economic Research Council grant NE/R014361/1 ‘Financial planning for disasters: the case of flooding risk in Central Java’.
The research in FloodFinJava has led to two key findings:
- The substantial challenges of institutional development required for greater use of financial instruments to manage the financial consequences of natural hazards in Indonesia. Various barriers and challenges were identified under several categories, namely, institutional, cultural, affordability, lack of awareness and knowledge, insurance arrangement process and lack of trust. This suggests that promoting an ‘ex-ante’ approach requires addressing cultural and institutional as well as technical modelling of financial risks and improving insurance education for multiple stakeholders, both formal and informal. Our supporting interview analysis with communities and public sector asset managers reinforces these findings, highlighting the difficult challenges of managing financial risks within the public sector. We also investigated the conduct of disaster risk finance in Indonesia, identifying opportunities for improved pooling of disaster risk through private sector insurance; and also through the creation of a captive state insurer.
- The promising possibilities for assessing exposure to financial losses from flooding, using relatively simple analytical tools applicable even in a data scarce environment such as that of Central Java. We investigated how reanalysis of rainfall data can be used to give local precipitation intensity-duration-frequency curves, even in the absence of rain gauge data. We have explored some simple calculations of insurance pricing using only limited information on flooding levels and broad approximations of portfolio exposures, investigating portfolio correlations on the island of Java (based on three cities, Jakarta as well as Semarang and Solo). These preliminary assessments of financial risks show that even quite crude approaches can be used as the basis for initial development of insurance-based protection. There can then be a reinforcing development of models, data and insurance products. Initial uptake of insurance solutions based on limited data and models and large margins of pricing over cost (to allow for model risk) in turn creating a demand for better data and risk modelling. The development of better data and risk models can then in turn support better understanding of risk and lower margin insurance provision.
We closed the project with a one-day conference in Jakarta on January 21st, 2020 attended by over 80 practitioners from the Indonesian insurance industry, as well as national and provincial policy makers and local and international researchers. This conference was a co-operation between our project and the Indonesian financial regulator Otoritas Jesa Kueangan.