Financial Strategy for Managing Natural Disasters: Emergency Funds to Insurance

JAKARTA — Residing in Indonesia implicitly requires readiness to face potential natural disasters. As part of the Pacific Ring of Fire, Indonesia is located within one of the most seismically and volcanically active zones on Earth. Beyond this, hydrological and ecological disasters also present issues requiring thorough preparation.

Financial planner Mike Rini of Mitra Rencana Edukasi explained that in facing disaster risks, Indonesian families need to evaluate their financial protection strategies.

First, a family must map potential natural disasters in their area of residence. This step can be supplemented with information from neighbours and data from the National Agency for Disaster Management (BNPB).

“Only then can we calculate the value of assets at risk. This is the foundation of calculating required funds,” he said.

This can be done by multiplying asset value by the percentage of potential damage when a disaster occurs.

As an illustration, a family estimates their property value at approximately Rp500 million, whilst the percentage of damage from natural disasters is predicted at around 30 to 50 per cent. This percentage figure is taken as the highest limit, with the assumption that damage exceeding 50 per cent would require complete renovation or render the property uninhabitable.

To calculate renovation cost projections, other factors must also be considered, such as increases in material prices, labour costs, and permits.

“Perhaps one and a half times (the at-risk asset value) should be set aside, depending on your estimate,” he said.

That figure could also be lower depending on the risk mapping available. For example, Mike said, if the factors affecting renovation are valued at 1.3 times, then the money that needs to be prepared for renovation is Rp260 million.