Financial planning for natural disasters: the case of flooding risk in Central Java

Loughborough will co-develop with our local partners and the flooding consultancy JBA associates a 'decision support framework' (or DSF) with demonstration software implemented in R and a series of analyses ('case studies') illustrating the use of loss and financial modelling to plan ahead for the financial consequences of extreme flood events. This DSF will be developed for analysing the potential use of financial instruments in two cities, Solo and Semarang, in Central Java Province, Indonesia. The main research task is developing a structured framework for model based analysis of financial loss from pluvial and fluvial flooding events. This will combine standard spatial data rainfall and flooding with local information e.g. on the exposure of infrastructure such as roads and bridge or location of vulnerable populations. The project will provide a software solution, incorporating exposure and financial modelling, with a graphical user interface for application by local disaster management agencies and other local stakeholders. A series of application case studies will provide illustrative applications at different levels of sophistication. At the end of the project the DSF will be handed over to our two local university partners for them to maintain and support post-project. We will also examine what lessons can be drawn from our research for improving financial planning for natural disasters (flooding and other hazards) and putting in place appropriate pre-arranged financing in Central Java, in other Indonesian provinces and in other countries.

The primary beneficiaries of our work are the local disaster management agencies and other stakeholders in the cities of Solo and Semarang in Central Java. Our work will help them better understand their financial exposures in the event of extreme flooding events and provide them with a decision support framework (or DSF) consisting of a modelling tools and accompanying case study analysis, that they can use for assessing the use of financial instruments (for example indexed insurance, catastrophe bonds, conventional indemnity insurance, pre-arranged financing through contingency credit, contingency reserves) to manage these potential exposures.

As well as this local impact we also hope to achieve wider impact on the financial planning for natural disasters in other Indonesian cities, in Central Java and in other provinces, especially those like Solo on the Bengawan Solo river or with similar morphology and susceptibility to flash floods as upper Semarang (this includes Jakarta). These will be communities for whom our 'DSF' can be relatively easily adapted to help them with understanding their exposure to financial loss from extreme flooding (though in the case of Jakarta this will require bringing into our modelling a substantial amount of additional relevant data.)

We also can achieve impact at national level - certainly in raising awareness of the use of financial instruments to protect against natural disasters and our work could,with further development, used for national level policy analysis, for example in building an Indonesian catastrophe loss pool for flooding risks or govenment purchase of financial protection.

Finally we envisage some impact on the growing international debate about the use of financial instruments to manage loss exposure in the event of natural disasters. While the case for doing this is a strong one, the 'devil is in the detail'. As we argue in our case for support, it is essential to take account of the local institutional structure and ensure that loss protection is provided to the right agency at the right time, in the right amount and at the right price. Locally focused research such as ours is necessary in order to achieve better understanding of when such instruments can benefit users, how to make them 'fit' with existing structures of national and local government finance and which particular instruments are most appropriate and how they are best used.