Physical flood risk analysis using the climate and financial risk approach

Abstract

Background: Demak Regency is one of the areas on the north coast of Java that consistently faces a high flood risk threat based on the Indonesian Disaster Risk Index from 2020 to 2024. This region faces two flood threats: fluvial flooding due to river overflows and tidal flooding due to sea level rise exacerbated by land subsidence. This paper aims to identify and quantify the physical risk of flooding in Demak Regency using a climate financial risk approach based on the Financial Services Authority (Otoritas Jasa Keuangan/OJK) framework. Methods: The analysis is carried out through four stages: risk identification, exposure mapping, risk quantification through scenario analysis, sensitivity analysis, and stress testing, as well as risk management using a 5x5 matrix. The data used are sourced from the Indonesian Disaster Risk Index, Indonesian Disaster Risk 2023, the Demak Regency Disaster Risk Study, and the Demak Regency Central Statistics Agency. Findings: The analysis results show that the flood risk profile of Demak Regency has consistently been in the high category for the past five years. Based on a scenario analysis with a time series assumption of 0.04% per year of the total flood hazard area of 92,656.92 hectares, the baseline potential economic loss is estimated to reach IDR 2.25 trillion for the medium category and IDR 17.81 trillion for the high category. Conclusion: Stress testing results with a threshold of IDR 2 trillion indicate that the high category losses in all scenarios exceed the threshold, so the Demak Regency flood is categorized as an extreme risk that has the potential to trigger credit, market, liquidity, and operational risks in the financial sector. Novelty/Originality of this article: Recommended mitigation includes strengthening infrastructure, early warning systems, and integrating flood physical risk into bank credit assessments.