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The Use of Financial Products in Mitigating Natural Disaster Risk Image

Promoting Inclusive Markets and Financial Systems

The Use of Financial Products in Mitigating Natural Disaster Risk

The Use of Financial Products in Mitigating Natural Disaster Risk

Summary

Globally, the frequency of natural disasters has steadily increased in recent decades, particularly the devastating storms and floods that many associate with climate change. Asia and the Pacific have borne the brunt of this alarming trend: natural disasters are now four times more likely to affect people in the region than those in Africa, and 25 times more likely than those in Europe. Natural disasters caused around $45 billion worth of damage in Asia and the Pacific in 2015 alone, affecting more than 59 million people, and financial losses from natural disasters continue to increase, with low-income populations feeling the greatest impact. A comprehensive disaster risk financing and insurance strategy can increase the resilience of vulnerable communities against the financial impact of disasters.

However, while there is a growing body of literature on the importance of financial products for building household resilience to natural disasters, research to understand what influences the uptake and use of products for disaster risk mitigation that could help inform the design and reach of these products has been limited.

This study helps to fill this gap through a household survey in Indonesia that examines levels of actual and perceived vulnerability to natural disasters, and how this links to the demand for and use of financial products for coping and recovery.

Major Findings

  • Financial services are more readily used by households to support recovery, but currently do not compensate for relief immediately after disasters.

  • Existing access to financial services may not translate to use of savings and financial services for disaster risk mitigation.

  • Expected losses from disaster are more pronounced for business income than wages, and for households with lower job and asset security.

  • There is little demand for commitment savings and insurance products for risk reduction, in contrast to high-demand for flexible savings accounts. The lack of demand for insurance is consistent with global evidence, and may be linked to lack of trust, lack of financial capability and heterogeneity in need for such risk protection.

  • Access to disaster-related financial services can have net psychological and behavioural benefits for investment.



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