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Demand for index-based flood insurance in Jakarta, Indonesia

Author

Listed:
  • Jose Cobian
  • Budy P. Resosudarmo
  • Alin Halimatussadiah
  • Susan Olivia

Abstract

Most megacities in developing countries are constantly exposed to flood risk, with a clear lack of understanding of insurance leading to poor risk management by urban populations. This paper analyses the demand for a hypothetical index-based flood insurance product among households in Jakarta, Indonesia. An expected utility framework is used to test whether this demand is significantly determined by the basis risk component of the insurance. The paper investigates the effects on insurance uptake of premium discounts, and risk aversion. Using distance of a house to the reference floodgate station (a proxy for basis risk), we find demand falls as basis risk increases. Additionally, the uptake decreases with price and risk aversion. We recommend further investment in floodgate stations to reduce basis risk, complemented with subsidies to encourage demand for this product. However, the level of discount offered to urban households is inconclusive and constitutes an important topic for future research.

Suggested Citation

  • Jose Cobian & Budy P. Resosudarmo & Alin Halimatussadiah & Susan Olivia, 2022. "Demand for index-based flood insurance in Jakarta, Indonesia," Departmental Working Papers 2022-12, The Australian National University, Arndt-Corden Department of Economics.
    • Handle: RePEc:pas:papers:2022-12
    as

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    File URL: https://acde.crawford.anu.edu.au/sites/default/files/publication/acde_crawford_anu_edu_au/2022-10/acde_td_cobian_et_al_2022_12.pdf
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    More about this item

    Keywords

    index insurance; basis risk; disasters; floods; Indonesia;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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