Government and disaster insurance

Indonesia is preparing a disaster insurance scheme to cover financial losses and provide for emergency needs as the country constantly faces strings of natural disasters causing heavy social burdens.
Finance Minister Agus Martowardojo said Thursday the insurance was important as natural disasters have caused increasing financial losses and emergency needs to handle the aftermath of such disasters.

The most recent natural disasters of an earthquake-triggered tsunami in Mentawai, West Sumatra, and the eruption Mount Merapi in Yogyakarta, have rallied people to show stronger support for the establishment of disaster insurance.

“I have asked the Indonesia Capital Market and Financial Institution Supervisory Agency chairman to conduct a study on the establishment of disaster insurance,” Agus told reporters at the Finance Ministry.

He added disaster insurance was a very common initiative for developed countries but not developing countries, including Indonesia. Agus said the government would soon reveal the study results in a meeting with stakeholders at the ministry.  “In principle, we have reached an agreement on the need to establish disaster insurance,” he said. “The insurance may be similar to other forms of life insurance,” he added without elaborating.  He only said the premium would be taken from the state budget although he was not sure whether it would be included in the 2011 State Budget.  Agus said the initiative needed careful arrangement including the insurance form, risk calculation and disbursement process.

“We will carefully study an appropriate insurance design to prevent any difficulties in its claiming process,” he said. “The proposed disaster insurance will be reinsured with world-class reinsurance companies. I haven’t seen any Indonesian companies that are ready to carry out the reinsurance program.”  Agus also said the government had proposed an additional disaster fund of Rp 150 billion (US$16.8 million) to the budget body of the House of Representatives. Previously, the government allocated a disaster fund of Rp 50 billion. Agus said the fund was separated from the budgetary allocation for the rehabilitation program. “The disaster fund will be managed by the National Disaster Management Agency [BNPB],” he said. The post-disaster rehabilitation program would have a separate budgetary allocation of more than Rp 3.5 trillion. The government allocates a total of about Rp 4 trillion for disaster management activities, higher than the Rp 3.79 trillion in the Revised 2010 State Budget. Ahsanul Qosasih, a member of the House Commission XI overseeing finance and banking, deplored the government for being unresponsive to strong public demand on the establishment of disaster insurance to minimize disaster risks. 

“It’s time for the government to establish disaster insurance,” he was quoted as saying by detik.com on Wednesday. “Disaster insurance is very urgent to support the disaster fund allocated within the state budget.” 

He said that his Commission had asked the Finance Ministry and the BNPB to officially propose and design a long-term disaster insurance scheme. “We have a very limited budgetary allocation for disaster management,” he said, adding that the insurance would be needed to cover any losses caused by natural disasters.

Disaster and Insurance

While many of us don't like the idea of paying our insurance premiums each year, we're always glad we did when we need to file a claim.  But how many of us even think about buying insurance against disasters?  We might even be lulled into complacency because we're thinking that our existing homeowners policy insures us against natural disasters.  But as we'll soon explain, that's not necessarily the case.

In this article we're going to explain what coverage you can expect from a "standard" homeowners insurance policy.  We're also going to talk about events that might not be covered under an existing policy that can lead to devastating losses.  With those two pieces of information, you can then make an educated decision as to whether or not you need to purchase disaster insurance.

Homeowners Insurance Coverage

The specific protection you're buying in a homeowners insurance policy that we're going to discuss in this publication has to do with property coverage.  We're going to talk about the protections available for damage to the home, or dwelling.  A homeowners insurance policy offers other protections too, such as liability insurance, but that particular topic is covered elsewhere on this website.

An insurance policy that offers the homeowner adequate protection will pay the costs required to rebuild the entire structure, as well as the replacement of much of the home's content.  But while your insurance company pledges to pay these costs, there is a limit to their generosity.  This limit is often stated in terms of the "perils insured against."

And while the exact coverage will vary from policy-to-policy, the following list should give you a good idea of the types of natural "disasters" that a standard policy covers:

• Fire / Lightning
• Windstorms / Hail
• Freezing of Plumbing / Pipes
• Damage from Weight of Ice
• Volcanic Eruptions (with exceptions)

On the other hand, your policy will also spell-out the disasters you're not insured against.  The most common exclusions to a policy include water damage, as well as damage caused by earth movement.

Disasters Not Typically Covered

If we examine the typical natural disasters that can strike home, our list is relatively short and includes:

• Earthquakes - while certainly more common in states like California, earthquakes can happen (albeit with low probabilities) nearly everywhere on earth.
• Floods - typically the result of abnormal rainfall, flooding can be the result of localized storms or hurricanes.  As is the case with earthquakes, floods resulting from hurricanes are more common in the Gulf Coast states and North Carolina.
• Windstorms - again, a windstorm can range from a localized burst of wind to more organized storms such as tornados.  Windstorms and tornados occur with a greater frequency in a stretch of the United States known as Tornado Alley which stretches through the states of Texas, Oklahoma, Kansas, Nebraska and South Dakota.
• Volcanic Eruptions - the least common of disasters, volcanic eruptions encompasses lahar (wet rock flow),  lava flows, and pyroclastic flows (a high-speed flow of hot, dry, gas and rocks).
• Landslides - typically the result of rainfall, volcanic eruptions, avalanches, earthquakes or other events triggering large land movements.
• Fire - in the context of naturally occurring disasters, the typical even might be a forest fire / wildfire resulting from lightning strikes.

Insurance Exclusions

In the same way that insurance companies are up-front about identifying the perils insured against, policies are also very clear on what's not covered - the exclusions.  Again, depending on your geography, as well as you insurance carrier, the two most common exclusions are:

• Earth Movement
• Flooding

So the good news is that you're very likely insured against many natural disasters already just by owning a homeowners insurance policy.  The bad news is that if you're in a flood prone area or live in an area of the country where earthquakes are relatively common, then you're going to have to purchase insurance against these disasters.

Disaster Insurance Policies

Before making any purchase decision, we suggest you take the time to open up your homeowners insurance policy and read through your existing coverage.  The exact coverage should be clearly spelled-out in your policy's buyer's guide or in the policy itself.  Only then will you have a clear picture of the types of disasters that are already covered by your policy.

As promised, we're going to finish up this article by explaining some of the options you have when it comes to purchasing disaster insurance.

Flood Insurance

Flooding can occur in nearly all 50 states.  In fact according to the Federal Emergency Management Agency (FEMA) around 30% of all flood claims originate from areas that are categorized as moderate-to-low flood risk.

Fortunately, flood insurance is universally available to homeowners via FEMA's National Flood Insurance Program (NFIP).  A home located in a moderate-to-low risk area can purchase $250,000 in coverage for just over $300 annually.  This same level of coverage in a high-risk area will cost in the neighborhood of $2,500.

Earthquake Insurance

In most states, earthquake insurance can be purchased directly from your homeowners insurance policy company.  The California Earthquake Authority (CEA) is a state-run insurance pool that is responsible for most of the policies sold in California.

The cost of earthquake insurance will vary by geography, the value of the home, the dwelling type (year built), as well as the number of stories (multilevel versus single story).  The factor having the biggest influence on cost, however, is the location of the home.  For example, a $1 million policy for new, single-story home will cost around $450 in the San Diego area, while that same policy for an identical home located in Oakland will cost closer to $2,300.

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Why Insurance

Insurance exists because risk exists. There is a possibility that anyone could become a victim of fire, theft, auto accidents, other injury accidents, illness, severe weather, lawsuits and more. We are subject to risk at home, at work, in our cars, traveling, in the hospital or anywhere at any time.

Insurance cannot remove the risk or the likelihood that one might become a victim of any of these events, but what it does is transfer all or some of the financial impact of any of these events. Insurance exists to help individuals recover from the financial consequences of these events by pooling the resources of a large group to pay for the losses of a small group.

Insurance has been around in some form since traders first began to travel over water to trade their goods. There is documented evidence that Chinese and Babylonian traders began to protect themselves against risk as far back as the 3rd century BC. Traders realized that if they spread their goods among multiple vessels, rather than putting all of their cargo on one vessel, they had a better chance of avoiding complete loss.

In later years, shippers in Great Britain reasoned that if 100 ship owners each chipped in money, if some of those ships were damaged or lost, the money collected from all 100 ships could be used to repair or replace the few. Extreme losses following the Great Fire of London in 1666 led to the creation of the world's first actual insurance company, The Insurance Office, or The Fire Office. And in the United States, the first insurance company was started in Charleston, South Carolina in 1732. Benjamin Franklin is recognized as helping to make insurance popular and to standardize the practice of insurance.