Demand for index-based flood insurance in Jakarta, Indonesia

Most megacities in developing countries are constantly exposed to flood risk, with a clear lack of understanding of insurance leading to poor risk management by urban populations. This paper analyses the demand for a hypothetical index-based flood insurance product among households in Jakarta, Indonesia. An expected utility framework is used to test whether this demand is significantly determined by the basis risk component of the insurance. The paper investigates the effects on insurance uptake of premium discounts, and risk aversion. Using distance of a house to the reference floodgate station (a proxy for basis risk), we find demand falls as basis risk increases. Additionally, the uptake decreases with price and risk aversion. We recommend further investment in floodgate stations to reduce basis risk, complemented with subsidies to encourage demand for this product. However, the level of discount offered to urban households is inconclusive and constitutes an important topic for future research.