NATURAL CATASTROPHE RISK MANAGEMENT POLICY
IN INDONESIA
PRESENTED AT THE GLOBAL CONFERENCE ON INSURANCE AND
REINSURANCE FOR NATURAL CATASTROPHE RISK IN ISTANBUL, TURKEY
8th- 9th 2005
By Werner G. Bugl, President Director
PT. Asuransi MAIPARK Indonesia
Executive Summary
This paper briefly discusses the current Natural Catastrophe Risk Management
Policy in Indonesia. It highlights the potential risk exposures of Earthquake,
Tsunami and Volcanic Eruption as the three main natural hazards in the country
and what actions have been taken by the Indonesian Government and the
Industry to anticipate future disasters.
As one of the world’s most seismically active regions, Indonesia is very much
prone to natural catastrophes. Recent examples are the devastating earthquake
and tsunami in Aceh which occurred in December 2004 and the destructive
earthquake in Nias in March 2005.
The Indonesian Insurance Association, supported by the Directorate of Insurance
of the Ministry of Finance, have been able to establish a National Earthquake
Insurance Pool in 2003 known as PRGBI. The pool was transformed into PT.
Asuransi MAIPARK Indonesia, or “Special Catastrophe Risk Reinsurance
Company” which commenced operation on January 1st, 2004. The formation of
MAIPARK aimed at:
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promote discipline and proper handling of EQ insurance
set a benchmark for EQ insurance pricing
collate national statistics and data bases
build strong local capacity for earthquake
MAIPARK as the nation’s Catastrophe Risk Reinsurer is funded by the industry
itself. Shareholders of MAIPARK are all non-life insurance and reinsurance
companies.
The market covers earthquake insurance by a separate Standard Indonesian
Earthquake Insurance Policy and a predetermined earthquake tariff.
Market penetration of Earthquake insurance remains low despite an increase in
demand following the Aceh and Nias events.
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Some of the future challenges are the implementation of the building code which
would lead to an improvement of the building stock and vulnerability or expected
claims. Change in the society’s culture towards insurance is also needed;
therefore, public education of the importance of insurance in general and natural
catastrophe insurance in particular is essential.
Some of the new initiatives are the attempt to introduce a Compulsory
Residential Earthquake Insurance Scheme. An early Warning System for
Tsunami with international technology and funding will be installed along the
West Sumatra Coast by 2007. Amongst potential opportunities for future growth
of MAIPARK are Flood Risk, Terrorism and Sabotage and gradual increase of
market cessions.
A comprehensive scientific study on sub-soil conditions is another new initiative
by MAIPARK, the results of which may further assist MAIPARK to establish a
proper technical pricing to the benefit of the consumers.
Potential Catastrophe Risks in Indonesia
Earthquakes
On 26th December 2004 a devastating Earthquake and ensuing Tsunami off the
coast of West Sumatra left some 170,000 people dead or missing and 550,000
displaced. It was a brutal and ruthless reminder that the Indonesian Archipelago
is one of the most vulnerable regions for natural disasters. A subsequent
earthquake in Nias on March 28th killed 1,300 people and displaced 22,000.
Property Damage caused by The Earthquake and Tsunami in Aceh
According to The Indonesian Bureau of Rehabilitation and Reconstruction of
Nanggroe Aceh Darussalam and Nias (BRR), Earthquake and Tsunami in Aceh
have destroyed at least 120,000 housing units, 690 health centers and 2,260
bridges and hundreds of kilometers of roads were ruined. Some 17,228 students
were killed and 150,000 students lost education facilities since 1,823 teachers
were killed and 2,112 schools destroyed.
Property Damage caused by The Earthquake in Nias
BRR estimates that at least 12,000 – 16,000 housing units were destroyed, 12
ports and piers and some 755 schools, 403 bridges and 800 km of local roads
were rendered unpassable.
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As you can see from the events effecting Aceh and Nias, the social and
economic costs of natural catastrophes can be enormous and lead to national
disaster. Earthquakes typically result in major damage to residential property of
which only a small percentage are covered by earthquake insurance, despite
perhaps being covered for fire.
Volcanoes
Indonesia is also home to thirteen percent of the worlds’ most active volcanoes,
posing yet another threat of potential exposure to natural catastrophes. Of some
122 active volcanoes, there are at least 80 of Type A volcanoes across the
Indonesian islands.
Region
Type A
Type B
Type C
Total
Sumatra
Java
Bali
Nusa Tenggara
Sulawesi
Maluku
Banda Sea
12
21
2
20
11
5
9
12
9
0
0
2
3
0
6
5
0
0
5
0
0
30
35
2
20
18
8
9
Total
80
26
16
122
Type A : Volcanoes erupted with emission of lava at least once since 1600
Type B : Volcanoes erupted without emission of lava
Type C : Volcanoes which have no record of eruption but show evidence of being
“alive”
The Government and Insurance Industry’s Role
Government involvement, unlike in other countries, plays only a small part in the
insurance of earthquake or any other natural perils at present. The role of the
Government must ideally go beyond disaster coordination, prevention, mitigation
and post disaster relief initiatives.
There is a National Coordinating Board for Disaster Management (BAKORNAS)
that sees its role primarily in providing relief after the occurrence of catastrophes.
There is currently no disaster law and no systematic pre-disaster planning.
The only responsible and professional approach for Government lies in a
sustainable ex-ante and not an ex-post solution. One of the solutions is to create
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a risk sharing partnership between the Private Insurance Industry and the
Government by the formation of a National Earthquake Risk Pool.
The Indonesian Insurance Industry, supported by the Ministry of Finance,
Directorate of Insurance, has established a Special Catastrophe Risk
Reinsurance Company, which commenced operations as from January 1 st 2004.
All General Insurance and Reinsurance Companies licensed to operate in the
Republic of Indonesia have been encouraged to become shareholders of this
company, which operates under the name of PT. Asuransi MAIPARK Indonesia
or “MAIPARK”.
Currently MAIPARK accepts by way of reinsurance a compulsory share between
5% to 25% of Sum Insured with a maximum of USD 2,500,000.00 any one risk of
all earthquake insurance policies written by its shareholders.
MAIPARK’s business license is not restricted to earthquake insurance and the
company was founded with the objective to assume the role of a National Special
Catastrophe Risk Reinsurer.
MAIPARK has already successfully weathered its maiden business year, which
was put to a severe test in the wake of the Earthquake and Tsunami in Aceh.
Funding of the Pool
Each member company of the Indonesian Insurance Association was invited to
become a shareholder of MAIPARK. Thus MAIPARK is owned by the Industry
itself and acts as the National Catastrophe Reinsurer.
The amount of shareholding was determined by the Ministry of Finance,
Directorate of Insurance, varying according to the size of the invested funds of
the insurers and reinsurers.
The total paid up capital is some USD 4.5 million whilst authorized share capital
is USD 5 million.
There is an intention to find alternative funding methods and/or sources to
increase funding capability of MAIPARK. MAIPARK has to grow its income and
thus strengthening its capital base, and looks for options to seek additional funds
through long-term debt and/or additional equity. Loans from International
Funding Bodies like The World Bank to replace expensive Retro Excess of Loss
Covers or to finance the launch of a National Earthquake Insurance Scheme of
residential houses across Indonesia which would be a much needed social
initiative, are priority goals of MAIPARK.
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The Indonesian Standard Earthquake Insurance Policy:
Coverage, Tariff & Premium Computation
The Indonesian Insurance Association has successfully introduced the
Indonesian Standard Earthquake Insurance Policy to the market. The policy must
be used by all general insurance companies operating in Indonesia for the
purpose of uniformity. MAIPARK’s reinsurance acceptances are subject to this
Standard Earthquake Policy. In practice this means that to insure earthquake
each ceding Company is required to issue a separate Earthquake Policy in
addition to the basic Fire / Property Cover with Terms and Conditions to follow
the Earthquake Insurance Technical Guidelines of MAIPARK.
Policy Coverage
The policy covers loss and/or damage to the insured’s property with or without
business interruption as a result of:
 earthquake shock
 fire following earthquake
 volcanic eruption and
 tsunami
Pricing
A reference Tariff has been set by the Insurance Association. It is divided by
Zoning, Building Category (simple risk, manufacturing risk and/or high rise
buildings) and Class Construction (reinforced concrete, steel frame or others).
The policy can be based on either Sum Insured basis (Full Value) or First Loss
basis.
The Reference Earthquake Tariff is ranging from 0.104% to a maximum of 0.33%
of the sum insured, with an average premium 0.12% across all zones.
Premium Computation
Premium is on annual basis or 12 calendar months. Therefore, should the
insurance period be less than 12 months, premium is computed by using the
short-period premium scale of the tariff rate and the sum insured.
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Market Penetration for Catastrophe Risks Insurance
Indonesian Insurance Industry
As of December 31st 2004, there are 101 Non-Life Insurance Companies
operating in Indonesia. In addition, there are 4 domestic Reinsurance
Companies, The market is said to be driven by brokers. The number of Insurance
and Reinsurance brokers has grown from 78 companies in 2000 to 141 by the
end of 2004.
Insurance Penetration
Non-Life Insurance penetration in Indonesia (Gross Premium in % of GDP) is
very low i.e. 0.69% in 2003 and 0.72% in 2004 respectively. The increase in
Insurance density shows that Insurance Industry is a growth sector of the
economy. The demand for natural perils such as earthquake is also gradually
increasing.
Penetration for Catastrophe Risks Insurance
Many Insurance Companies are still reluctant or slow to promote earthquake
insurance in Indonesia, no doubt mainly because Insurers recognize it as a risk.
A characteristic feature of natural catastrophes is their low occurrence frequency
but high loss impact. In view of low probability, the general cultural attitude in
many Asian Countries, particularly in Indonesia, is that most people tend to
ignore the risk of natural perils. This attitude unfortunately remains unchanged
even after the earthquake and tsunami in Aceh.
There are at least 3 (three) alternatives to promote catastrophe risk insurance :
1. As a standard peril included within a fire policy
2. As an additional cover in conjunction with a fire policy at additional
premium or as a separate policy on its own
3. Under a Government supported insurance scheme, often in a compulsory
manner, where Government intervene to increase penetration of
Catastrophe insurance.
A combination of all three options is our goal.
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Earthquake Insurance Take-Up Rate
Prior to the introduction of the earthquake tariff earthquake premium accounted
for approximately < 2% of the property premium. The same goes for the number
of policies written. Only approx. 2% of all property policies had earthquake cover.
In 2003, earthquake premium written went up to approx. 10% of the property
premium whilst the number of policies remained at about the same level of 2%.
The main driver for the premium increase clearly is the predetermined tariff rate.
Another driver is improving compliance in reinsuring with MAIPARK. This is
achieved with the help of company inspections jointly carried out by MAIPARK
and the Insurance Supervisory Authority.
Estimated Insured Values at Risk
In the absence of relevant market statistics we have done our own simulations on
the basis of MAIPARK data. The bottom line is that currently the highest value at
risk (value of insured assets and their spatial distribution) as a result of
vulnerability (loss ratio or expected claims as a proportion of the TSI as a function
of ground shaking intensity, construction type, building occupancy and age
category, magnitude of earthquake and distance from hypocentre) is in the area
of US$ 1 bio. This simulation assumes a 1:500 years probability return period.
Take-up rate in West Java/Jakarta is probably above the average < 2 % for the
country but surely not more than 10 – 15 %. The estimated uninsured value at
risk therefore is approx. US$ 6 – 9 bio.
Future Challenges
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Gradually increase the “shareholders” cession limit to augment premium
income for MAIPARK. By doing so, the objective to retain more in the
domestic market and gradually become more independent from overseas
Reinsurers and reduce outflow of foreign currency.
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More insurance education of the society is required, in particular the need
to have insurance protection against natural disasters. In the long run we
wish to see gradual change in the culture towards insurance.
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Implementation of a more sophisticated Building Code must be
established by the Indonesian Authorities. Presently Insurers don’t engage
in very professional underwriting practices with regard to building licenses.
The number of illegal structures is quite considerable. Stricter compliance
needs to be enforced or exclusions may have to be imposed by insurers /
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Reinsurers. Ultimately, proper risk exposure assessment must be
improved.
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Promote the decree of a Natural Disaster Law in the nearest future
imposing ex-ante rather than post-ante disaster handling procedures.
New Initiatives
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As a social responsibility towards citizens efforts are made to introduce a
Residential Earthquake Insurance Scheme; some degree of compulsion
would be useful. Insurance Schemes for Residential Houses have been
successful in Japan, Taiwan, Turkey, Australia and New Zealand.
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It seems negligent to expose donor funds for the rehabilitation and
reconstruction of Aceh and Nias to the risk of being lost in another natural
disaster. You can not bank on foreign donations after every disaster. A
National Earthquake Insurance and Reinsurance Scheme should be
considered to insure the donated investment for the reconstruction of
Aceh/Nias.
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Tsunami Early Warning System. To date 2 (two) buoys have been
installed and a pressure sensor has been planted on the seabed off the
coast of Western Sumatra in mid November this year in a cooperation
between Indonesian and German Scientists. The Indonesian Authorities in
cooperation with foreign technology and funding are aiming at installing 20
buoys along Sumatra’s coast by 2007.
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As the Special Catastrophe Risk Reinsurance Company, MAIPARK may
soon extend its role to cover Terrorism and Sabotage Insurance.
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The Indonesian Insurance Association has prepared the technical
underwriting guidelines including pricing of flood risks in Indonesia. The
progress made so far is the zoning codes for Jakarta. Once the guidelines
are completed and the reference tariff has been agreed by members of the
Association, MAIPARK will further extend its business role as Flood Risk
Reinsurer in addition to its current role as Earthquake Risks Reinsurer.
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MAIPARK is considering to accept business offered in addition to the
shareholders cession limit be it facultatively or by treaty.
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Study on sub-soil conditions across Indonesian will be undertaken. The
Institute of Vulcanology & Geological Hazard Mitigation of Indonesia has
conducted a preliminary study on soil condition for West Java despite lack
of funding. The Government needs to pay more attention to funding of
projects that address vital aspects of the public well-being. Findings of the
study are very useful to the insurance industry especially in reassessing
exposures and proper pricing for earthquake and landslide cover. A
homework for the nation.
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