Financialising risk is no panacea for Indonesia’s flood woes

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For several years, Indonesia has also been considering issuing catastrophe bonds, a tool promoted by the World Bank to transfer risk to the private capital market. Typically, catastrophe bonds include a parametric trigger, meaning that payouts are only made when the catastrophe meets particular criteria, such as falling within a geographically-bounded area.

Catastrophe bonds tend to only protect against large-scale disasters, and not more common, smaller-scale disasters. Plus, as climate change makes predicting future events more challenging, there is a risk that the models used to develop parametric triggers are wrong. This could mean that the disasters that actually occur do not trigger payouts, as was the case for the 2016 drought in Malawi.

While risk pooling and other insurance-linked security instruments can ensure liquidity in the wake of a disaster, they do nothing to reduce the risk of disaster in the first place. Neither do they necessarily assist the most vulnerable communities or reduce their vulnerability to disasters. The World Bank portrays risk pooling as an instrument that protects the vulnerable and poor, though the evidence for this is mixed.

Jakarta offers a cautionary tale. The city’s flood mitigation plans have often put poor residents at greater risk. Not only have households been subject to forced eviction, but the city has previously refused to grant compensation, maintaining that citizens did not have legal access to or ownership of the land they occupied. This treatment of the urban poor raises questions about how payouts would be used in the wake of a disaster. Integrating a pro-poor mandate into the risk pool and putting in place measures to track how payouts are spent could help to ensure that the most vulnerable people receive assistance.

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