The Boundary of the Market for Biosecurity Risk

Abstract

Imported goods create value in destination countries but also create biosecurity risk. Although widely used in other domains of the economy, risk markets have not been created to manage losses that occur when exotic pests and diseases are introduced with traded goods. In this article we show that not all biosecurity risks are insurable. Losses arising from effort needed to detect and respond to exotic pests and diseases that breach national borders appear to be insurable because <i>entry</i> of these threats and consequent response costs, can be regarded as random events. As pests and diseases <i>establish</i> and <i>spread</i>, however, loss of access to export markets and productivity losses display systematic risk and appear to be uninsurable. Other insurability criteria support this definition of the boundary of biosecurity risk markets.<br/>We use the Australian biosecurity system as an example, although the framework described in this study will be applicable to biosecurity systems worldwide. We argue that biosecurity risk insurance could be incorporated into the current biosecurity system but would require legislation mandating importers to purchase insurance. Advantages of actuarial pricing of biosecurity risk are: (i) an increase in economic efficiency to the extent that importers respond to the price of biosecurity risk; (ii) financial sustainability would improve because actuarial pricing creates a structural link between funds available for biosecurity activities and risk exposure; and (iii) equity issues evident in the current biosecurity system could be addressed because risk creators (importers) would fund response activities through the purchase of insurance.