Economic Evaluation of Bt Corn Refuge Insurance

Paul D. Mitchell, Iowa State University
Terrance M. Hurley, Iowa State University
Richard L. Hellmich, United States Department of Agriculture

This article is from Center for Agricultural and Rural Development Working Papers 00-WP 243 (2000): 26pp. Posted with permission.

Abstract

The EPA has imposed mandatory refuge requirements for Bt crops to prolong the efficacy of Bt. Growers have no economic incentive to plant the required refuge because refuge crops are on average less productive and more risky. This paper evaluates refuge insurance—insurance that pays indemnities for yield losses on refuge due to insect damage—as a tool to increase grower compliance incentives. We determine actuarially fair insurance premiums, then evaluate the feasibility of private provision of refuge insurance and its impact on grower incentives to comply with refuge requirements. A private market for refuge insurance appears unlikely because our analysis suggests that even a 2 percent load on the actuarially fair premium makes growers unwilling to buy refuge insurance. This load is not sufficient to cover administrative costs and provide a normal economic return. Even actuarially fair refuge insurance increases grower compliance incentives less than 3 percent. This result occurs because the primary benefit of Bt corn is yield enhancement and not risk reduction, but refuge insurance only reduces risk. For refuge insurance to provide significant compliance incentives, conventional insurance products must be restructured to draw premiums from sources other than grower risk premiums.