JAKARTA -- Bracing for future calamities after a pair of devastating tsunamis last year, the Indonesian government is considering issuing catastrophe bonds that will serve as insurance policies against natural disasters.
An official with Indonesia's Ministry of Finance disclosed that the government was discussing issuing the securities, which let the issuer secure recovery funds in the event of a disaster in exchange for high returns to investors.
From 2000 through 2016, Indonesia suffered an average of 22.8 trillion rupiah ($1.6 billion) in direct economic damages annually from natural disasters, while its disaster response spending averaged 3.1 trillion rupiah, or just over 10% of what was needed, according to the Finance Ministry.
The lack of funds can erode disaster prevention efforts. After the September earthquake and tsunami that struck the island of Sulawesi, killing thousands, it was revealed that Indonesia's tsunami warning system had not been working since 2012. An official from the national disaster management agency said budget shortfalls had prevented maintenance and inspections. In December, another tsunami in western Java killed hundreds.
Catastrophe bonds, a type of derivative, may put all or part of the investor's principal toward insurance payouts in the event of a disaster. The risk is balanced by relatively high interest rates, offering strong returns if no disaster strikes.
The securities are gaining traction as a way to limit financial risk from natural disasters. In February 2018, Chile, Colombia, Mexico and Peru teamed with the World Bank to issue $1.36 billion worth of catastrophe bonds for earthquake responses, while in October the Philippines announced it was looking into floating its own. In earthquake-prone Japan, Tokyo Disney Resort operator Oriental Land got an early start with a $100 million, five-year catastrophe bond in 1999.