by Dan R. Anderson, Ph.D.,CPCU - Wisconsin School of Business ...

I n t ro d u c t i o n 

Genetically modified org a n i s m s 

(GMOs) are the leading edge of 

the developing biotech industry 

of life sciences. In a recent article in the 

H a rv a rd Business Review, the authors 

s t a t e d : 

. . . advances in genetic engineering will not 

only have dramatic implications for people and 

s o c i e t y, they will reshape vast sectors of the 

world economy. The boundaries between 

many once-distinct businesses, from 

agribusiness and chemicals to health care and 

pharmaceuticals to energy and computing, will 

b l u r, and out of their convergence will emerge 

what promises to be the largest industry in the 

world: the life science industry. (Enriquez and 

Goldberg, 2000) 

GMOs are also at the center of the 

s t o rm of the debate over the benefits 

versus the risks of GMOs. Jeremy Rifkin, 

a long-time GMO critic, predicts that 

genetically modified food will become: 

the single greatest failure in the history of 

capitalism in introducing a new technology into 

the marketplace. (Stecklow, 1999) 

The funds expended to date by 

chemical companies, pharm a c e u t i c a l s , 

f o od processors, agricultural and other life 

science companies, and the potential for 

e n o rmous revenues and profits dictates 

that the development and business 

applications of GMOs will almost sure l y 

goes forw a rd. Risk managers, bro k e r s , 

insurance officials, and consultants of the 

e ffected business sectors obviously must 

be attuned to the risks of this emerg i n g 

t e c h n o l o g y. But lessons can be learned by 

all players in the risk management and 

insurance industry from the complexity 

and importance of issues and risks 

deriving from GMO technology. 

An analysis of GMO technology risks 

goes far beyond product liability and 

recall risks. GMO technology involves 

business and reputational risks, as well as 

e n v i ronmental, ethical, cultural, social, 

and even religious questions and issues. 

The GMO debate has been heightened 

by the globalization of the world 

e c o n o m y, raising World Tr a d e 

O rganization conflicts, and pitting the 

E u ropean Union countries against the 

United States. The management of GMO 

risks is possibly the most vivid example 

t oday of the expanding scope of risk 

m a n a g e m e n t . 

This article will concentrate on the 

a rea of genetically modified (GM) cro p s 

and foods. In terms of commerc i a l 

applications of GMO technology, GM 

c rops and foods have seen the most 

by Dan R. Anderson, Ph.D.,CPCU 215

Biotechnology Risk Management: The Case of Genetically Modified Organisms (GMOs) 

extensive development. In addition, most of the 

discussions and arguments of GMO technology 

has focused, as would be expected, on GM food s 

and crops. Thus it seems logical that the art i c l e 

examine this important subset of biotechnology. 

In addition, lessons can be garn e red that will 

have application to pharm a c e u t i c a l 

developments, as well as possible genetic 

m odifications in human beings. 

The purpose of this article is five fold: 

1 . To give the reader a brief, general primer on 

GMO technology. 

2 . To discuss the anticipated benefits and the 

wide variety of potential risks associated with 

GMO technology. 

3 . To contrast the positions of developed versus 

developing countries relative to GMOs. 

4 . To examine re g u l a t o ry and world trade issues 

of GMO technology. 

5 . To discuss the risk management and 

insurance issues and challenges of managing 

GMO risks. 

The Basics of GMOs 

The life science industry has evolved out of 

the science of biotechnology. The life science 

i n d u s t ry employs the manipulation of genes in a 

wide variety of products and areas. The life 

science industry includes two broad industry 

a re a s — a g r i c u l t u re / f o od sciences and 

p h a rmaceuticals. While this article concentrates 

on the agriculture / f o od sciences industry, there 

a re overlaps and interconnections between the 

two. Most notable are the mergers and 

acquisitions between the two industries, such as 

the purchase of seed companies by 

p h a rmaceutical groups like Novart i s , 

AstraZeneca, and Schering-Plough (Enriquez 

and Goldberg, 2000), and the merger of 

Monsanto with Pharmacia Corporation. 

Yet the risk profile of the pharm a c e u t i c a l 

i n d u s t ry is much diff e rent than that of 

a g r i c u l t u re / f o od sciences. Pharmaceutical dru g s 

a re much more rigorously regulated, involve 

extensive testing before utilization, re q u i re strict 

labeling, and involve choice by users. Because 

of these diff e rences and also the enormity and 

scope of each industry, the author has 

concentrated on agriculture / f o od sciences. 

The manipulation of human genes, the ultimate 

f rontier of the life science industry and 

b i o t e c h n o l o g y, is obviously an expanded are a 

requiring separate study. 

Genetically modified organisms are also 

re f e rred to as genetically engineered org a n i s m s 

(GEOs), genetically altered org a n i s m s 

(GAOs), or transgenic organisms. So the term s 

genetically modified (GM), genetically 

e n g i n e e red (GE), genetically altered (GA), 

and transgenic can be used interc h a n g e a b l y. 

Genetically modified organisms has pro b a b l y 

been the most widely used term in publications 

and hence is used in the title of this section 

and the title of the article. GMO technology 

has concentrated to date on plants and 

animals, with particular emphasis on plants 

and their seeds. 

The cells of living organisms have sets of 

chromosomes that control the organism’s life. 

Chromosomes are made up of genes, each of 

which is a piece of DNA that contains a code 

to make a specific protein. Proteins make up 

much of organisms’ cells and tell the cells 

what to do. 

For centuries farmers have selectively bred 

plants and animals to arrive at better gene 

combinations to increase their yield or their 

resistance to disease. With the experiments 

and studies of Austrian monk and botanist 

Gregor Mendal in the mid-1800s, breeding 

efforts took on a more scientific basis. 

Mendal’s experiments with garden peas 

resulted in the formulation of the basic laws of 

heredity and initiated the science of genetics. 

In the 1900s the development of hybrids of 

corn and other staple crops would become 

increasingly important and commercially 

successful. Yet all these efforts involved the 

exchange and varied combinations of genes in 

the same or closely related living organisms. 

When James Watson and Francis Crick 

d i s c o v e red the molecular stru c t u re of DNA, 

the door was opened to genetic engineering or 

m odification. Dr. Martha Crouch, associate 

p rofessor of biology at Indiana University, 

defines genetic engineering as: 

the process of manipulating the pattern of proteins in 

an organism by altering genes. Either new genes are 

added, or existing genes are changed . . . [and] 

because the genetic code is similar in all species, 

genes taken from a mouse can function in a corn 

plant. (Frazer, 1998) 

It is this ability to transfer genes from one 

species to another that is so appealing and 

c reates a virtual unlimited potential for 

m odified living organisms. Organisms can be 

made to exhibit new characteristics. Crops can 

be made resistant to pests, drought, and even 

herbicides to increase their yields. Defective 

genes in plants and even humans could be 

re p a i red to ameliorate or eliminate the adverse 

e ffects of a disease. 

216 CPCU JOURNAL 

Abstract 

The development of crops and 

food using genetically modified 

o rganisms (GMOs) is an 

i m p o rtant area of biotechnology. 

GMO risk management goes far 

beyond traditional product liability 

and recall exposures to include 

significant potential ethical, 

cultural, reputational, business, 

and genetic pollution 

e n v i ronmental risks. Intern a t i o n a l 

trade rules and conventions impact 

GMO risk management. Finally 

lessons learned from GMOs can 

be applied to pharm a c e u t i c a l 

development and genetic 

manipulation in human beings. 

Dan R. Anderson, Ph.D., 

CPCU, is the Leslie P. 

Schultz professor of risk 

management and insurance 

at the University of 

Wisconsin-Madison School 

of Business in Madison, 

Wisconsin. 

Author’s Note: 

I would like to thank Renato 

Mandaliti, a former risk and 

insurance graduate student from 

Brazil, whose paper on GMOs 

for my class stimulated my 

thinking on this subject. His 

paper won the Edith Licota 

Award at the National RIMS 

meeting. I would also like to 

thank Zhao Ye, my current 

research assistant from China, 

who assisted in collecting and 

assembling material for this 

article. Finally I want to express 

my appreciation to Brenda 

Jansen, our department 

administrative assistant, for her 

impeccable preparation of the 

manuscript.

“It is 

also this 

ability 

to cross 

biological 

boundaries 

that creates 

the greatest 

fears . . .” 

It is also this ability to cross biological 

boundaries that creates the greatest fears—that 

we are messing with mother nature and natural 

e v o l u t i o n a ry development that have prod u c e d 

living organisms over millions of years in the 

way they are and for specific reasons. Disturbing 

this process may produce unforeseen and 

potentially catastrophic risks. The problem is 

we just do not know, but by the time we do 

k n o w, it may be too late to reverse or contro l 

the consequences of these unknown risks. It 

sounds like science fiction, but this is the re a l 

world as it exists, and the risk management 

community—indeed all of society will need to 

c o n f ront and deal with the risks of genetic 

engineering. As stated by Dr. Bruce Curr i e , 

p rofessor of animal science at Corn e l l 

U n i v e r s i t y : 

The biggest concern is the degree of uncertainty in 

manipulating genes. Especially when dealing with 

pleiotropic genes—those which have multiple 

actions—there can be surprising side effects. There is 

no simple formula for anticipating these intangibles. 

(“Risk Reporter . . .,” 1998) 

The recent completion of the mapping of 

the human genome extends potential benefits 

and risks into the human realm. The human 

genome refers to the sequencing of DNA in the 

a p p roximately 34,000 genes contained in 

human cells. It will take some time before 

human genes are actually manipulated, but 

t oday genes are being manipulated in plants, 

the subject of this article. By examining the 

benefits and risks of GMOs, much can be 

l e a rned not only about plants, but also about 

potential applications in humans. 

Benefits of GMOs 

The benefits of GMOs can be divided into 

two broad categories. One involves the 

experimentation and commercial production 

of GMOs for farmers in developed countries, 

l a rgely the United States. Emphasis is on the 

superior characteristics of GMOs to make them 

a more attractive purchase for farmers re l a t i v e 

to traditional crops/seeds. The second category 

is the use of GMOs in developing countries to 

combat hunger by increasing yields and making 

c rops more pest and drought resistant, and even 

enhancing the crops’ nutritional values. 

Marketing to Farmers in Developed 

C o u n t r i e s 

Seed companies or more commonly 

chemical and pharmaceutical companies that 

p u rchased seed companies have invested 

heavily in developing and marketing GMOs to 

f a rmers in the past several years. Monsanto, 

WINTER 2001 


with its investment in/purchase of several seed 

companies, including Calgene, DeKalb 

Genetics, Ecogen, Argacetus, and Holden’s 

Foundation Seeds (Lenzner and Upbin, 1997) 

and Dupont with its $9.4 billion purchase of 

Pioneer Hi-Bred are perhaps the two best 

examples. Monsanto spun off its traditional and 

historical business of commodity chemical 

business into a new company, Solutia, in 1997 

and invested $8 billion in various biotech and 

seed companies. (Enriquez and Goldberg, 2000) 

In just two years, 1996 to 1998, the crop are a 

using genetically modified seeds incre a s e d 

fifteen fold, to almost 28 million hectares. By 

the end of 1999, about 57 percent of soybeans, 

50 percent of cotton, and 40 percent of corn 

g rown in the United States was from genetically 

m odified seeds. It is estimated that by late 1999, 

a p p roximately 60 percent of processed food s 

available in U.S. food stores were derived fro m 

genetically modified foods. (Pollack and Shaff e r, 

2000) The United States in 1999 was prod u c i n g 

72 percent of the world’s GMO products, with 

A rgentina producing 17 percent and Canada 

10 percent. (Paarlberg, 2000) 

GMO crops were marketed by seed 

companies/divisions and used by farmers for 

their superior characteristics over traditional 

crops. These characteristics included better 

yields, lower costs, less chemical use, and pest 

resistance. Two particularly successful GMO 

crops are Bt Corn and Roundup Ready 

Soybeans. 

Bt Corn 

Bt corn was developed by genetically 

m odifying corn to resist pests, specifically the 

c o rn bore r. Inserting a gene for the soil 

bacterium, Bacillus thuringiensis or Bt, into corn 

gives it resistance. The obvious benefit is the 

reduction of chemicals used to control the corn 

b o re r. Organic farmers also approve Bt, a 

naturally occurring soil organism, for direct use. 

(Denison, 1999) A Bt cotton has also been 

developed. If only benefits are considered, Bt 

GM crops clearly are environmentally friendly. 

Roundup Ready Soybeans 

One problem with applying herbicides and 

pesticides is to kill the weeds/pests without 

damaging the crops. Chemicals had to be 

applied at diff e rent times and not necessarily at 

the optimal time in order to avoid damaging 

the crops. Through gene manipulation 

Monsanto developed soybeans with a built-in 

immunity to glyphosate, the active ingre d i e n t 

in Monsanto’s herbicide Roundup. With these 

GM soybeans, farmers could control weeds with 

217


a single application of Roundup, which 

p reviously would have been lethal to the cro p . 

This reduced the need to employ more toxic 

and long-lasting herbicides and also re d u c e d 

soil-damaging tillage. GM soybeans became so 

popular with farmers that by 1999 more than 

one-half of the soybean crop were genetically 

m odified. (Paarlberg, 2000) 

Other Examples 

T h e re are a number of other GMO examples 

that have been widely discussed. The Flavr- S a v r 

tomato has a gene that was altered to slow the 

aging process and extend shelf life. Another 

GM tomato involved inserting an antifre e z e 

gene from a fish (flounder) into tomatoes to 

make them frost resistant. (Denison, 1999) 

F u t u re health benefits could be gained fro m 

c h o l e s t e rol-lowering cheese, allerg e n - f re e 

peanuts, and immunity-boosting bananas 

as a substitute to syringe injected vaccines. 

(Jacobs, 2000; and Pollack, 2/6/2000) 

Again the possibilities and potential benefits 

seem virtually unlimited. 

Marketing to Farmers in Developing 

C o u n t r i e s 

Because of the large and often rapidly 

i n c reasing populations in developing countries, 

GM crops hold the potential for considerable 

benefits. It is estimated that 800 million people 

in the world are chronically malnourished and 

this number is increasing rapidly. (Stipp, “The 

Voice . . . ,” 2000) Increasing yields and builtin 

resistance to drought, pests, and poor soils 

could increase food production and re d u c e 

chemical use. Potential benefits could also 

include the insertion of vaccines into foods 

and the development of more nutritious food . 

A frequently cited example is golden rice, a 

GM rice to include vitamin supplements to 

fight blindness. 

Golden Rice 

Golden rice is a GM strain of rice that 

includes bacterial and daff odil genes that allows 

it to make beta-carotene that the body convert s 

to vitamin A. Vitamin A has the potential 

benefit of preventing night blindness and deaths 

caused by vitamin A deficiencies. Golden rice 

was developed by public sector scientists in 

Switzerland and Germany and will be given fre e 

to poor farmers in developing countries. 

(Pollack, 2/4/2001) 

Lack of Adequate Resourc e s 

While the potential benefits of GM crops for 

developing countries is appealing, critics charg e 

that food production is not the problem; rather 

it is poverty and lack of adequate re s o u rces to 

p u rchase food that leads to famine and 

malnourishment. The world today prod u c e s 

m o re food per inhabitant than ever before . 

Enough is available to provide 4.3 pounds to 

e v e ry person every day: 2.5 pounds of grain, 

beans and nuts, about a pound of meat, milk 

and eggs, and another pound of fruits and 

vegetables. (Rosset, 1999) 

The problems are distribution systems and 

lack of financing to move food to regions 

needing it. Farmers in developing countries 

often would not be able to afford GM 

products made in developed countries. 

In addition, markets in developed countries 

have been targeted first for GM products 

because of the need to recoup the high costs 

of GMO development. 

Lack of resources also dilutes the benefits 

of GM crops like golden rice. Critics contend 

there are multiple nutritional deficiencies that 

will impede the effectiveness of vitamin A 

enhancing golden rice, and will also produce 

other nutritional problems. (Pollack and 

Yoon, 2001) 

It has also been questioned whether the 

p rofits generated by marketing GM crops to 

developing countries are sufficient to maintain 

c o m m e rcial development. Finally others have 

c o u n t e red that GM crops should be avoided 

a l t o g e t h e r, and emphasis should be put on local, 

sustainable, cultural-compatible agricultural 

development as is captured in the statement 

b e l o w : 

We do not believe that such companies or gene 

technologies will help our farmers to produce the 

food that is needed in the 21st century. On the 

contrary, we think it will destroy the diversity, the 

local knowledge and the sustainable agricultural 

systems that our farmers have developed for 

millennia and that it will thus undermine our capacity 

to feed ourselves. (Statement of 24 African delegates 

to the Food and Agriculture Organization of the 

United Nations, June 1998) 

Risks of GMOs 

There are definitely risks in the 

development of GMOs. Some specific risks 

have been documented and will be discussed 

below. As the set of future potential benefits 

greatly exceeds the documented benefits of 

GMOs, so too does the set of future potential 

risks greatly exceed the documented risks of 

GMOs. With both benefits and risks we are 

working in the realm of the potential and the 

unknown. Huge uncertainty and 

unpredictability are present, which of course 


“While the 

potential 

benefits 

of GM 

crops for 

developing 

countries 

is appealing, 

critics 

charge 

that food 

production 

is not the 

problem . . .”

“The 

widespread 

planting of 

Bt crops 

increases 

the 

likelihood 

of the 

evolution of 

‘superbugs’ 

resistant to 

the toxin.” 

create risks within themselves. In addition to 

involving the typical risks of injuries and 

property damages, potential risks of GMOs 

include cultural, ethical, and religious 

ramifications, as well as reputational risk 

and the business risk that consumers may 

refuse to buy GMO products. Finally, the 

unpredictability and potential irreversibility 

of genetic pollution risks will be considered. 

Specific Risks 

A l l e rg e n s 

A frequently re f e renced specific risk is 

a l l e rgenic reactions. This could occur fro m 

consumption of a product that includes genes 

f rom a foreign species such as peanuts. A study 

re p o rted in the New England Journal of Medicine 

by Dr. Julie Nordlee of the University of 

Nebraska and colleagues found that soybeans 

m odified to contain genes from Brazil nuts 

t r i g g e red allergic reactions. (Nordlee, et. al., 

1996) In another study at York Nutritional 

L a b o r a t o ry in England, re s e a rchers found a 

substantial increase in soy allergies in 

conjunction with the introduction of GM 

soybeans in that country. (Denison, 1999) 

A dramatic example of unforeseen re a c t i o n s 

resulted from the use of a specific type of 

t ryptophan, a dietary supplement that was 

m a n u f a c t u red from GM bacteria. Initially no 

one considered taking tryptophan as risky since 

it is a naturally occurring nutrient found in 

milk. In 1989, 37 deaths and thousands of cases 

of debilitation and/or partial paralysis were 

associated with taking this type of try p t o p h a n . 

While it is not conclusive on exactly what 

tainted the supplement, a study published in 

S c i e n c econcluded that it may have been a toxic 

novel amino acid created by genetic 

engineering. (Denison, 1999) 

Antibiotic Resistance 

Genes that confer antibiotic resistance are 

used as markers in GMOs. At issue is whether 

such antibiotic resistance could spread. This 

could contribute to the more general problem 

of antibiotic-resistant bacteria, which have seen 

i n c reased development because of society’s 

o v e ruse of antibiotics. 

Roundup Ready and Bt Cro p s 

In a previous section on the benefits of 

GMOs, Roundup Ready Soybeans and Bt corn 

and cotton were discussed. There are potential 

downsides to these GM crops that have been 

f requently cited. If the herbicide-re s i s t a n t 

characteristics of Roundup Ready Soybeans 

WINTER 2001 


s p read to a weedy relative, a “superweed” might 

be created. While Bt corn eliminates the corn 

b o re r, it might also harm beneficial insects (see 

below). As Bt corn is tilled into the soil, its 

toxins may alter the chemistry and essential 

o rganisms of soil. Indeed, no one knows the 

l o n g - t e rm effect of eating Bt crops on human 

health. When organic farmers or others use Bt 

as a natural bacteria to spread on a crop, it is 

killed by sunlight and any residues can be 

washed off. But with GM crops, the Bt gene is 

e n g i n e e red into the DNA of the crop and is not 

a ffected by sunlight or washing. 

The widespread planting of Bt cro p s 

i n c reases the likelihood of the evolution of 

“superbugs” resistant to the toxin. This 

possibility is particularly upsetting to org a n i c 

f a rmers as they use Bt as a natural pesticide. 

O rganic farmers could be put in serious jeopard y 

if Bt were re n d e red ineffective against Btresistant 

pests. 

M o n a rch Butterfly Study 

In May 1999, entomologist John Losey, 

behavioral ecologist Linda Rayor, and 

biologist Maureen Carter published a study in 

the journal Nature that found the pollen of Bt 

corn is lethal to the monarch butterfly 

caterpillar. (Losey, et. al., 1999) The study 

prompted immediate concern for monarchs in 

the field because the annual migration of the 

butterflies takes them right through the U.S. 

corn belt. The monarch caterpillars would 

encounter the Bt corn pollen on the leaves of 

their favorite food, the milkweed, which grows 

in and around cornfields. 

This study was important and received a 

g reat deal of publicity because it was the first 

evidence that pollen from a GM plant can 

h a rm non-pest species. It also pro v i d e d 

evidence that GM crops could have unfore s e e n 

e ffects on the environment. While it was 

known that Bt toxin is lethal to many 

b u t t e rflies and moths, the threat to the 

m o n a rch butterfly was a previously unsuspected 

risk. (Yoon, 5/20/1999) 

Subsequent studies have indicated that the 

risks may be minimal (Yoon, 9/26/2000). For 

instance, Mark Sears of the University of 

Guelph in Ontario, Canada found that Bt 

pollen does not travel far beyond the corn fields 

and monarch caterpillars are unlikely to get 

s u fficient doses of Bt corn pollen in the out of 

doors to be lethal. (“Biotech Foes . . . ,” 1999) 

In September 2000, the EPA issued a 

p re l i m i n a ry re p o rt concluding that GM corn is 

219


unlikely to pose a serious threat to monarc h 

b u t t e rflies. Yet the EPA noted that data was still 

being collected and a more conclusive re p o rt 

would be issued in the future. (Yoon, 9/26/2000) 

Cultural, Ethical, and Religious Risks 

Cultural Risks 

The production of GMOs is heavily 

c o n c e n t r a t e d — a p p roximately 82 percent in 

N o rth America. Significant portions of all cro p 

p roduction in North America is exported. U.S. 

f a rmers export more than 25 percent of the 

c o rn, soybean, and cotton they produce, and 

m o re than 50 percent of wheat and rice. 

( P a a r l b e rg, 2000) There f o re, the manner in 

which these crops are produced will impact 

other cultures. The European Union countries 

have largely refused to import GM crops or 

made import difficult. At least one reason for 

their refusal is cultural diff e rences. For instance, 

in France the ingredients and the pre p a r a t i o n 

and consumption of food is a way of life. The 

F rench refer to their culinary sovere i g n t y, so 

when you alter their food you impact their 

c u l t u re. In India, bollworm infestation in cotton 

plants has caused havoc. Insects have developed 

resistance to the heavy volume of pesticides 

sprayed on fields. In Indian field tests, a GM 

cotton variety, modified to control bollworm s , 

was showing promising results. Yet farm e r s , 

disturbed that their livelihoods may be 

t h reatened by these corporate biotech 

developments, burned the test plots in pro t e s t . 

( P a a r l b e rg, 2000) 

Ethical Risks 

Genetic engineering raises the ethical issue 

of whether we should be altering nature. 

While conventional breeding techniques 

produced improved hybrid crops, these hybrids 

could have developed naturally. With GM 

crops, biological species boundaries are 

crossed. Bacteria genes would not move into 

corn or fish genes would not cross into 

tomatoes in any natural circumstances. This 

only can occur in the biotech laboratory with 

gene gun technology. Many individuals and 

organizations are questioning whether from a 

societal and ethical basis this should be done 

at all. Natural food sources have developed 

and evolved over thousands, even millions of 

years, and for a reason—they were best 

adapted to fit into the natural world. Since 

GM crops are developed in the laboratory, 

questions of whether and should they fit into 

the natural world are being pondered. 

Religious Risks 

Even religious issues are being raised 

re g a rding GMOs. Many religions hold to the 

sanctity of the natural world—that humans are 

a part of the natural world and should fit 

h a rmoniously into the natural world and should 

not artificially alter it. Recently Pope John Paul 

II urged those who are developing new 

biotechnologies to keep a “healthy balance” 

with nature to avoid putting people’s lives at 

risk. He urged rigorous scientific and ethical 

c o n t rols to avoid possible “disaster for the 

health of man and the future of the Eart h , ” 

f rom new agricultural technologies. 

He further stated: 

If the world of most refined techniques doesn’t 

reconcile itself with the simple language of nature in a 

healthy balance, the life of man will run even greater 

risks of which already we are seeing worrying signs. 

(D’Emilio, 2000) 

Genetic Pollution Environmental Risks 

Genetic pollution of the environment is 

p robably the biggest unknown with GMO. 

With conventional types of pollution like a 

chemical spill, they can be cleaned up. Or a 

conventional product like an automobile, 

which is defective, can be recalled. But if some 

unknown, unpredictable adverse effect re s u l t s 

f rom GMOs, the effect could be uncontro l l a b l e , 

p e rmanent, and irreversible. And of course by 

that time it would be too late. The defective 

gene or GMO would be out in the natural 

world and in all likelihood nonrecoverable. 

Some adverse consequences could be tested 

in the laboratory or in a controlled experiment. 

For instance, Australian scientists recently have 

accidentally created a virus that kills mice by 

crippling their immune system. The scientists 

w e re attempting to make the mice infertile by 

adding a gene in the mouse immune system to 

the mouse pox virus. The experiment, which 

was controlled, had the unanticipated effect of 

making the virus deadly for mice norm a l l y 

resistant to the disease. The scientists were 

f u rther surprised because past re s e a rch had 

indicated that GM viruses were less viru l e n t 

than their natural progenitors. (Broad, 2001) 

While the above was a success story, albeit 

accidental, if the adverse effect is delayed or 

unanticipated, it may occur when the GMO 

has been released in the natural environment 

where it may be uncontrollable and 

irreversible. As noted by Charles Benbrook, 

agricultural consultant and former director of 

the board of agriculture for the National 

Academy of Sciences: 


“Genetic 

pollution 

of the 

environment 

is probably 

the 

biggest 

unknown 

with 

GMO.”

“Consumers 

in the 

United 

States have 

been rather 

indifferent 

to GM 

foods, 

particularly 

compared to 

Europeans.” 

You don’t mess around with the genetic base of a food 

production system as fundamentally as some of these 

biotech applications are, without causing some things 

to change. It is really scientific hubris to think that we 

understand all that, because we don’t. This stuff is just 

horrendously complicated. (Denison, 1999) 

Business Risk—Customers Wo n ’t Buy It 

From a commercial development 

standpoint all the risks discussed above may 

collectively augment the business risk that 

customers and markets will refuse to buy GM 

food products. Regulatory constraints to be 

discussed in a subsequent section will further 

constrain companies getting GM products to 

potential customers. 

E u ro p e 

E u ropean consumers have been skeptical of 

GM foods since they first started being 

developed. Just as GM foods were first being 

c l e a red for import into European markets, the 

first mad cow disease scare hit in 1996. While 

GM foods are not related to mad cow disease, it 

generated new consumer anxieties about food 

s a f e t y. The scare also undermined consumer 

t rust in re g u l a t o ry and scientific opinion as U.K. 

public health officials had given consumers 

assurances that there was no danger in eating 

beef from diseased animals. (Paarlberg, 2000) 

While mad cow disease, or Bovine Spongiform 

Encephalopathy (BSE), which only exists in 

cattle, had been discovered in Britain in the 

1980s, it was not until 1996 that it was publicly 

announced that a possible connection may exist 

between BSE in cattle and Cre u z f e l d - J a c o b 

Disease, a rare but fatal disease found among 

humans. (Pollack and Shaeff e r, 2000) The mad 

cow disease problem has spread to other 

E u ropean countries and currently is causing 

considerable consumer consternation and 

market disru p t i o n s . 

In May 1999, it was discovered that 

Belgium farm animals had been given dioxincontaminated 

feed. This discovery resulted in 

the removal of Belgium chicken, eggs, pork, 

and beef from the entire EU market. (Pollack 

and Shaffer, 2000) And in June 1999, 

hundreds of French and Belgium residents 

were sickened by drinking contaminated 

Coca-Cola. The contamination apparently 

came from a batch of defective carbon 

dioxide, as well as from a fungicide that may 

have rubbed off some wooden pallets onto its 

cans of soda. (Mitchner and McKay, 1999) 

Given this history and experience of these 

f o od scares, it is not surprising that Euro p e a n s 

may be skeptical of any type of tampering with 

f o od, including genetic modifications. These 

WINTER 2001 


s c a res have also seriously eroded the confidence 

of Europeans in their food safety authorities. 

(Pollack and Shaff e r, 2000) 

European activist groups, most notably 

Greenpeace, joined the protest and inflamed 

consumer fears of GM foods. Substantial 

publicity was generated when Paul McCartney 

and Prince Charles joined the questioning of 

GMOs. The collective protests dubbed GM 

foods as “Frankenfoods,” hardly positive 

publicity if you are trying to sell your GM 

product. 

United States 

Consumers in the United States have been 

rather indiff e rent to GM foods, part i c u l a r l y 

c o m p a red to Europeans. Americans also have 

m o re confidence in governmental food 

regulations like the FDA. (“Science and 

Technology . . .,” 1999) But with the anti-GM 

f o od activities and regulations in other 

countries gaining more and more attention, it 

seems likely that U.S. consumer attitude could 

change. The recent case of StarLink corn could 

exacerbate the situation. 

The case of StarLink corn is the most 

dramatic example of adverse financial and 

risk-related effects that can arise from the 

commercialization of GM products. Costs are 

estimated to be in the $100 millions. Several 

liability suits have been initiated. Executives 

have been fired and the reputation of Aventis, 

who developed StarLink, has been adversely 

impacted. 

StarLink corn is a GM crop with a 

genetically inserted pesticidal bacterial pro t e i n 

known as Cry9C. It is similar to Bt corn in that 

it has been genetically modified to produce its 

own insecticide. The EPA approved StarLink 

c o rn only for animal consumption. The EPA 

decided in 1997 that Aventis’ technology 

should be kept out of human food because 

l a b o r a t o ry tests indicated that the protein might 

cause food allergies. (Feder, 2000) StarLink is 

the only GM corn that is not approved for use 

in U.S. food consumed by humans. 

In the fall of 2000, StarLink corn was 

discovered in Taco Bell brand taco shells 

and other products of at least two food 

manufacturers, Kraft Foods and Mission Foods. 

The discovery was actually made in laboratory 

tests at Genetic ID, which were paid for by 

the Friends of the Earth. It was announced at 

a September 18, 2000, press conference 

covered by Genetically Engineered Food 

Alert, a coalition of environmental and 

consumer groups. (Crenson, 2000) After these 

221


discoveries, these manufacturers recalled their 

taco shells and other corn products from 

grocers’ shelves. Several corn millers were 

forced to suspend operations to clean their 

facilities. (Brasher, 2000) The Kellogg 

Company closed several lines at a cereal 

manufacturing plant in Memphis, Tennessee 

because a supplier could not guarantee its corn 

was free of a GM-modified grain yet approved 

for consumption. (Collins, 2000) Some 35 

reports of adverse health effects from StarLink 

corn experienced by 44 consumers came in a 

two-month period following the discovery of 

StarLink in Kraft Foods taco shells. (Pollack, 

11/29/2000) 

Aventis Crop Science, a U.S. subsidiary of 

Aventis, the French pharmaceutical and 

agricultural company, is incurring substantial 

costs related to its StarLink corn. While 

Aventis received less than a million dollars in 

licensing fees on StarLink, it is estimated that 

its cost to resolve the issue would be in the 

h u n d reds of millions of dollars. No future 

revenues are forthcoming as Aventis has 

withdrawn its license for future sale. (Barboza, 

12/11/2000) Farmers whose crops were 

contaminated are being reimbursed under a 

U.S. Department of Agriculture program in 17 

states that is funded by Aventis. Aventis has 

p romised to find markets for this year’s StarLink 

c o rn and farmers are being off e red a 25-cent 

p remium per bushel over the market cost of 

c o rn. Aventis also has pledged to compensate 

grain elevator owners and grain handlers for 

expenses related to the eff o rt to keep Star Link 

c o rn out of the food chain. (Bradford, 2001) 

Aventis faces substantial costs in the future . 

A class action suit involving several hundre d 

thousand farmers who produced clean corn, but 

contend they lost overseas revenues because of 

damage to the U.S. corn supply, has been filed. 

( B r a d f o rd, 2001) Another group of farmers who 

did not plant StarLink corn but whose corn was 

contaminated by StarLink corn is suing for 

damages. (Barboza, 12/4/2000) Consumer suits 

have also been filed alleging allerg i c - t y p e 

injuries from the StarLink corn. (McKay, 2000) 

Nearly every major food and agricultural 

company is testing for Cry9C from StarLink so 

f u rther recalls and expenses could re s u l t . 

Aventis is seeking temporary approval of 

StarLink from the EPA to mitigate costs so that 

the food industry could avoid further recalls and 

f u t u re testing would not have to be so 

extensive. A recent hearing and re p o rt by a 

federal advisory panel of scientists found there 

was a medium likelihood that StarLink is a 

potential allergen. It recommended more tests, 

which the EPA said would be conducted, so any 

a p p roval at best is far in the future. (Pollack, 

12/6/2000) Finally Aventis fired the head of its 

U.S. crop-science division and two other top 

managers in the wake of the StarLink situation. 

( F u h rmans, 2001) 

Reputational Risk 

Closely related to the business risk that 

customers will not buy GM foods is a firm ’s 

reputational risk. Firms and groups exposed to 

reputational risks could include the GMO 

technology companies, farmers, grain handlers, 

f o od processors, and food manufacturers and 

retailers. Reputation is important to any 

o rganization, but food companies with stro n g 

brand power can suffer exceptional losses fro m 

reputational risks. 

When customers consume a food prod u c t , 

p a rticularly from a sealed package, bottle, or 

can, they assume it is safe to eat. If one 

contaminated batch injures consumers, the 

adverse publicity and reputational damage can 

be severe. Recall the bankruptcy several years 

ago of the Bon Vivant Company following 

botulism poisoning in a batch of its canned 

soups. More recently the contaminated Coke 

fiasco in Belgium and France, particularly the 

e ffects on school children, tarnished Coke’s 

worldwide image and reputation. While not a 

f o od company, the reputational damage to the 

F i restone Company from SUV ro l l o v e r 

accidents caused by defective tires may result in 

the demise of one of the oldest, most re c o g n i z e d 

brands in the United States. 

In response to concerns on GM foods and 

grains, several companies chose to avoid their 

use to eliminate potential damages fro m 

reputational risks and business risks. For 

instance, first Gerber and then Heinz in the 

summer of 1999 announced that they would use 

only non-GMO products in their baby food s . 

(Nelson, et. al., 1999) In January 2000, Frito- 

Lay announced that it would stop using GM 

c o rn in its Fritos, Doritos, and Tostitos chips. 

(Barboza, 6/4/2000) In Spring of 2000, 

M c D o n a l d ’s began quietly telling its fre n c h - f ry 

suppliers to stop using the potato fro m 

Monsanto, the only firm to commercialize a 

GM spud. (Kilman, 4/28/2000) Additional 

examples of corporations distancing themselves 

f rom GMO risks will be presented in a later 

section on risk avoidance. 


“In response 

to concerns 

on GM 

foods and 

grains, 

several 

companies 

chose to 

avoid their 

use to 

eliminate 

potential 

damages 

from 

reputational 

risks and 

business 

risks.”

“In 

February 

2001, 

the 

European 

Union 

Parliament 

passed a 

measure 

that 

established 

strict 

rules on 

GMOs . . .” 

While such potential GMO risks as the 

“superbug,” or “superweed,” or severe allergic or 

toxic reaction, or other serious genetic pollution 

have not actually materialized, the adverse 

e ffects on the reputation of any firms associated 

with such developments would be catastro p h i c . 

The fact that considerable warnings, criticism, 

and opposition will have preceded any such 

development would only aggravate the 

reputational and liability losses. 

Regulation and World Trade Issues 

United States 

Regulations of GMOs in the United States 

have been relatively benign, part i c u l a r l y 

c o m p a red to Europe. In May 1992, the FDA 

issued a policy statement: 

The agency is not aware of any information showing 

that foods derived by these new methods differ from 

other foods in any meaningful or uniform way. 

The effect was that corporations would not 

need government approval to sell the foods they 

w e re developing. GM crops were considered to 

be essentially the same as those produced by 

conventional breeding methods. Genetic 

m odification was not considered an additive 

that would have re q u i red safety testing and 

labeling. Testing was not re q u i red, but a 

company could perf o rm it voluntarily. 

Because of the increasing public debate on 

GM foods, the FDA in January 2001 pro p o s e d 

rules to make safety reviews of new GM food s 

m a n d a t o ry before bringing the foods to the 

market. The rules stop short of mandatory 

a p p roval. The proposed rules will not impose 

many new burdens on the companies because 

they are already notifying and providing data to 

the agency voluntarily. Guidelines were also 

issued on how food companies could voluntarily 

label products that did employ genetic 

engineering. While these proposed rules and 

guidelines re p resent a step up in re g u l a t i o n , 

many stakeholders argued for stro n g e r 

re q u i rements like mandatory approval, not just 

re v i e w, of new GM foods and mandatory 

labeling. (Pollack, 1/18/2001) 

In reaction to the monarch butterfly 

studies, the EPA required in January 2000 that 

farmers using Bt crops must plant at least 20 

percent of their crop and 50 percent of their 

cotton crop with conventional seeds. This will 

partially provide a screen for the butterfly 

larvae and reduce the probabilities of insects 

developing Bt resistance. 

WINTER 2001 


E u ro p e 

In contrast to the United States, Euro p e a n 

Union Directives re q u i re both mandatory 

a p p roval of GM crops before they can be 

planted (1990 EU Directive) and mandatory 

labeling of all packaged food that contains GM 

c o rn and soy (1998 EU Directive). The United 

Kingdom went even furt h e r, requiring the 

restaurants, caterers, and bakers list all GM 

i n g redients or face fines up to $8,400. Finally in 

April 1998, the EU stopped approving new GM 

c rops for use in or import into the EU. 

( P a a r l b e rg, 2000) Cultural diff e rences, less tru s t 

in government regulators, and food - re l a t e d 

s c a res discussed above contribute to gre a t e r 

societal pre s s u re in EU countries than the 

United States to regulate GM crops and food s . 

In Febru a ry 2001, the European Union 

Parliament passed a measure that established 

strict rules on GMOs, preparing to end Euro p e ’s 

u n o fficial moratorium on new bioengineere d 

seeds and food. The rules govern the testing, 

planting, and sale of crops and food for humans 

and animals and the testing and sale of 

p h a rmaceuticals. Under the rules, companies 

have to apply for licenses that will last 10 years 

and to pass approval processes. All genetically 

a l t e red products will be tracked in a central 

database that will also mark the locations of all 

c rops. A separate bill to set tough food labeling 

and tracing re q u i rements was to be in place by 

April 2001. (McNeil, 2001) 

With the changes, the thre e - y e a r- o l d 

moratorium should end sometime in 2002. Still 

this is not a done deal as many members of 

E u ropean Green parties abstained from the 

vote. In addition, the French government issued 

a statement saying it and the governments of 

Austria, Denmark, Greece, Luxembourg, and 

Italy all wanted the moratorium kept in place. 

(McNeil, 2001) 

Other Countries 

Tough re g u l a t o ry stances are also present in a 

number of other countries. Japan and Kore a 

have tightened approval pro c e d u res for GM 

varieties and re q u i re mandatory labeling of 

genetically modified seeds and foods. Australia 

and New Zealand announced in 1999 that they 

would re q u i re labeling of all GMO-derived 

f o ods. (Pollack and Shaeff e r, 2000) Thailand 

d e c l a red in mid-1999 that GM seeds would not 

be brought into the country until proven safe 

for human consumption. Brazil, whose export s 

of GM-free products to Europe and Japan have 

i n c reased during the GMO debate, has 

223


t h reatened to burn the fields of farm e r s 

smuggling in GM soybean seeds fro m 

A rgentina, and to jail any farmers found to be 

g rowing GM soybeans. (Paarlberg, 2000) A 

number of developing countries in general 

s u p p o rt more restrictions on GM foods, as they 

fear that large corporations will develop too 

much power and control over seed technologies. 

The terminator crops that produce sterile seeds 

and prevent farmers from saving seeds for next 

y e a r’s crops are a case in point. 

C a rtagena Protocol and the 

P re c a u t i o n a ry Principle 

The Cartagena Protocol on Biosafety re f e r s 

to the January 2000 agreement at the Montre a l 

Round of international negotiations on the 

Convention on Biological Diversity (CBD). 

While not obvious from its name, the CBD 

s e rves as the primary forum for discussions and 

a g reements re g a rding GMO regulations and 

conventions. The CBD was originally 

f o rmulated in negotiations associated with the 

1992 Rio de Janeiro United Nations 

C o n f e rence on Environment and Development. 

(Buttel, 2000) In Febru a ry 1999, the United 

States and other grain-exporting countries 

blocked the first attempt to develop an 

a g reement in Cartagena, Colombia. The United 

States actually is not a signatory to the 1992 

CBD. President Clinton signed the CBD in 

1993, but Senator Jesse Helms has not allowed 

a Senate vote on the CBD. (Raeburn, 2000) 

Still the United States was at Montreal in an 

o b s e rver status, and was able to influence the 

talks through its agricultural allies, Canada and 

Australia. (Cooper and Kilman, 2000) In 

addition, the United States must adhere to any 

trade rules imposed by countries signing the 

pact, even if it does not sign. 

The agreement reached in Montreal was not 

surprisingly considered a compromise. But most 

o b s e rvers felt the agreement favore d 

e n v i ronmentalists and opponents of GMOs 

over the United States and its allies, part i c u l a r l y 

with inclusion of the Pre c a u t i o n a ry Principle in 

the agre e m e n t . 

The Pre c a u t i o n a ry Principle holds that a 

c o u n t ry may restrict imports generally, and in 

this case GM imports, if the country fears it 

could be harmful to biological diversity, and by 

extension to human health. (“Global Deal . . .,” 

2000) Article 10 of the protocol provides that a 

c o u n t ry may reject the import of “a living 

m odified organism for intentional introd u c t i o n 

in the environment” where there is “lack of 

scientific certainty re g a rding the extent of the 

potential adverse effects . . . on biological 

diversity in the Party of import, taking also into 

account risks to human health.” A similar 

p rovision applies to a country ’s rejection of bulk 

GM commodities (e.g., soybeans, wheat, corn , 

cotton) for food, feed, or processing. (Pollack 

and Shaff e r, 2000) 

In other words, no GMO will be appro v e d 

for trade until it is first proven safe. The burd e n 

of proof to show the product is safe is on the 

e x p o rt e r, which in the case of GMOs, is 

p redominantly the United States. The 

E u ropean Union has previously used the 

P re c a u t i o n a ry Principle to justify decisions to 

ban imports and re q u i re labeling. 

I n t e restingly the Pre c a u t i o n a ry Principle is 

just the reverse of the World Tr a d e 

O rganization (WTO) rule that forbids any 

nation from banning imports unless it can be 

p roved to a “scientific certainty” that prod u c t s 

a re unsafe. In other words, the burden of pro o f 

is on the importing country to show that the 

p roduct is unsafe. (Sullivan, 2000) In the 

M o n t real agreement it is stated that national 

rejection of an imported GMO product must be 

based on credible scientific evidence, and that 

the intention behind the agreement is to not 

s u p e rcede the WTO rules. (Buttel, 2000) But 

clearly there will be further discussions/ 

a rguments to reconcile the seemingly 

c o n t r a d i c t o ry positions of the CBD Montre a l 

a g reement and WTO ru l e s . 

The Montreal agreement also contains for 

the first time under an international agre e m e n t , 

re q u i red labeling of commodity shipments that 

“may contain” GMOs. The United States was 

able to soften rules that would have re q u i re d 

labels giving specific details of what GM 

materials were in products. The United States 

a rgued that the segregation of conventional and 

GM crops that are currently commingled would 

cost the grain industry billions of dollars. 

Another provision provides that exporters will 

be re q u i red to obtain an importing country ’s 

a p p roval, through a pro c e d u re known as 

“advance informed agreement” (AIA) for initial 

shipments of GMOs intended for release into 

the environment, like seeds and trees. GMOs 

intended for food, feed, and processing are 

exempted from AIA re q u i rements, but must 

have the “may contain” label. GMOs used as 

p h a rmaceuticals for humans are exempted. 

Finally a Biosafety Clearinghouse will be 

established where governments can post the 

results of their domestic safety tests on GMOs 

for others to examine. (“Global Deal . . .,” 2000) 


“The 

Precautionary 

Principle 

holds that a 

country may 

restrict 

imports 

generally, and 

in this case 

GM imports, 

if the country 

fears it could 

be harmful to 

biological 

diversity, and 

by extension 

to human 

health.”

“Innovation 

and creativity 

will be 

needed to 

address the 

risk control 

and financing 

issues 

associated 

with GMO 

risks.” 

The Cartagena Protocol on Biosafety was 

signed by 130 countries. It will become law 90 

days after ratification by 50 nations. 

Risk Management and 

Insurance Issues 

The risk management and insurance issues 

associated with GMO risks are challenging. 

The above discussion has demonstrated the 

expanded scope of GMO risks. GMO risks have 

the potential of creating significant long-tail 

liability events. Innovation and creativity will 

be needed to address the risk control and 

financing issues associated with GMO risks. 

To date little has been written in risk 

and insurance literature on GMO risks. 

While insurers are certainly on notice for 

potential Starlink/Aventis claims and 

rape/Advanta claims (to be discussed below), 

the author is not aware of any claims that 

have been paid. Because GMOs are new and 

because of the variety of potential risks, it 

would seem that insurance coverage issues 

will most certainly arise. 

Risk Management at the Front End 

In dealing with GMO risks, risk 

management thinking is critical at the fro n t 

end. In discussing GMO risks, potential 

consequences have included those described as 

unknown, irreversible, and uncontro l l a b l e . 

While the United States and the Euro p e a n 

Union and the CBD and the WTO debate 

employment of the Pre c a u t i o n a ry Principle, 

I would suggest that risk managers across these 

f o rums would reach fundamental agre e m e n t 

that the use of the Pre c a u t i o n a ry Principle is 

most appropriate in managing GMO risks. 

CEOs of companies in this field should have 

risk managers by their sides or at least have risk 

management as a critical part of overall 

development strategies. 

The story of Monsanto’s strategic 

development of GM crops as re p o rted in a N e w 

York Times a rticle is illustrative of this advice. 

In the 1980s, Monsanto’s strategy committee 

developed a go-slow approach to the 

i n t roduction of GMO technology. While 

scientific studies had shown few risks with 

GMO technology, they recognized the various 

potential and perceived risks, part i c u l a r l y 

consumer apprehension and ethical questions 

of manipulating gene pools. Their original plan 

was to engage environmental groups and other 

opponents in a dialogue, to reach some sort of 

consensus that the benefits of GMO technology 

WINTER 2001 


exceed the risks. Government re g u l a t o ry 

oversight was even proposed to increase public 

confidence. It was not re p o rted whether 

M o n s a n t o ’s risk manager was part of this 

strategic committee, but clearly risk 

management thinking pre d o m i n a t e d . 

(Eichenwald, et. al., 2001) 

In the 1990s, under the leadership of Robert 

S h a p i ro, this go-slow consultative strategy 

changed. Monsanto aggressively moved its 

GMO technology into commercial applications. 

Initial results were very successful; Monsanto’s 

stock soared, and in the short run the strategy 

was clearly successful. While commerc i a l l y 

successful, this strategy galvanized the 

opposition of long-time opponent Jere m y 

Rifkin, director of the Foundation on Economic 

Trends and a large number of enviro n m e n t a l 

g roups. The food scare developments in Euro p e , 

the European Union opposition to GM cro p s 

and foods, the Monarch butterfly study, the 

C a rtagena Protocol, and the Starlink fiasco all 

diluted the public trust. Coupled with decisions 

by some farmers, grain handlers, and food 

p rocessors to abandon using GMOs, Monsanto’s 

s h o rt - t e rm success came to a halt, its stock sank, 

and it eventually was merged with Pharm a c i a . 

(Eichenwald, et. al., 2001) James Wi l b u r, an 

analyst with Salomon Smith Barn e y, estimated 

that investors valued Monsanto’s agricultural 

business unit at less than zero dollars in 

evaluating Monsanto’s total market 

capitalization. (Stipp, “Is Monsanto’s Biotech 

World . . .,” 2000) 

R o b e rt Shapiro, Monsanto’s CEO during this 

p e r i od, was considered sympathetic to 

e n v i ronmental concerns, and a humanitarian as 

well as a top business executive. He saw the 

potential benefits of GMO technology, like 

feeding the world’s hungry and cutting chemical 

use, but he underestimated the issues of 

consumer confidence and public trust. (Kilman 

and Burton, 1999) He would later admit, 

“ We’ve learned that there is often a very fine 

line between scientific confidence on the one 

hand and corporate arrogance on the other. It 

was natural for us to see this as a scientific issue. 

We didn’t listen very well to people who 

insisted that there were relevant ethical, 

religious, cultural, social, and economic issues as 

well.” (Eichenwald, et.al., 2001) 

Expanded Scope of Risks 

Risk managers have traditionally dealt with 

losses associated with pro p e rty damage, business 

i n t e rruptions, and liability exposures. More 

225


recently some risk managers have incorporated 

financial risks like credit, curre n c y, and intere s t 

rate risks into their domain. Some risk managers 

a re confronting ethical risks like Nike’s 

handling of its sweatshop issues. And all risk 

managers are concerned with any adverse 

impacts on a company’s reputation. The risk 

management of GMO technology needs to deal 

with all these risks, as well as venturing into the 

philosophical, the metaphysical, and re l i g i o u s 

a reas. It deals with what may be the ultimate 

risk issue—the deliberate manipulation of 

n a t u re ’s gene pool. 

To date, GMO risks have been largely 

perceived as potential risks rather than risks 

that have led to actual injuries and damages. 

With the exception of the deaths associated 

with the dietary supplement containing 

tryptophan discussed above, there are few if 

any cases of serious injuries to humans 

involving GM foods or crops. It has frequently 

been suggested that had GM foods and crops 

clearly defined benefits to consumers, 

particularly in developed countries, they 

might have been more successful. But the 

benefits to date have gone entirely to GMO 

firms and farmers, so when perceived risks are 

presented to customers, it is easy for them to 

switch to non-GM foods. In developing 

countries, if the choice was between GM 

crops and starvation, the benefits would 

clearly exceed perceived risks. China, for 

example, with the largest population in the 

world, 1.3 million people to feed, is clearly 

committed to the use of GMO technology in 

its agricultural production programs. (Leggett 

and Johnson, 2000) GM drugs or genetic 

modification of human genes that eliminates 

life threatening/debilitating diseases or reduces 

their consequences clearly have benefits that 

in most cases would exceed risks. 

Av o i d a n c e 

Avoidance is a risk management control tool 

that often cannot be utilized for obvious 

practical reasons. For instance, if you are a 

m a n u f a c t u rer of automobiles, you cannot avoid 

the product liability risk if you are going to be 

in business. The only way to avoid the risk 

would be to not manufacture automobiles, 

which of course would eliminate your entire 

concept of being in this business. 

On the other hand, avoidance can be a very 

practical tool for developers and users of GMO 

t e c h n o l o g y, as firms have a choice. For instance, 

earlier in the article, the corporate firms of 

G e r b e r, Heinz, McDonald’s, and Frito-Lay were 

discussed re g a rding their decisions to 

discontinue using GM ingredients in their 

f o ods. Additional examples include Japan’s two 

major breweries, Kirin and Sapporo, food giants 

U n i l e v e r, Nestle, and Seagrams, and Gru p o 

Maseca, Mexico’s largest tortilla maker. (Pollack 

and Shaff e r, 2000) Clearly in all these situations 

reasonable options existed as comparable non- 

GM ingredients are available. 

In the United Kingdom, major food 

m a n u f a c t u rer and retailer Sainbury introd u c e d 

the policy in 1999 of eliminating GM 

i n g redients in its brand products. Marks and 

S p e n c e r, also in the United Kingdom, ord e red a 

total ban in 1999 on GM foods in all its store s . 

(Nelson, et. al., 1999) Two of the largest natural 

f o od chains in the United States, Wild Oats 

Markets and Whole Foods Markets, also plan to 

eliminate GM ingredients from their store 

brand products. (Stipp, “Is Monsanto’s biotech 

w o rth . . .,” 2000) 

Rather than completely avoid, some firm s 

like grain companies Archer Daniels Midland 

and Cargill have asked farmers to separate their 

GM crops from their conventional ones. 

(Eichenwald, et. al., 2001) These decisions have 

caused problems among farmers because 

separation between GM and non-GM crops and 

seeds is difficult and expensive. These 

separation difficulties also extend to grain 

elevators. (See Kilman, 1999; and Barre t t , 

2000.) It may be that individual farmers will 

have to commit to going totally with GM cro p s 

or totally with non-GM crops, which re q u i re s 

m o re difficult decision making. It is estimated 

that U.S. farmers are losing $200 million a year 

in corn exports because of European opposition 

to GM foods. (Care y, 1999) GM cro p s 

i n c reased steadily through 1999, but field 

s u rveys indicate that U.S. farmers will cut back 

on GM crops by about 20 percent in 2000. 

( Ta n g l e , y2000) 

Life science companies are also engaging in a 

f o rm of avoidance by segregation by spinning off 

their agricultural units. For instance, the merg e r 

of the divested agricultural businesses of 

N o v a rtis and AstraZeneca, two large Euro p e a n 

p h a rmaceutical companies, formed Syngenta. 

(Pollack and Yoon, 2001) 

Risk Financing 

The impact of GMO risks on risk financing 

can only be estimated as few claims have been 

filed. The Aventis/Starlink corn and 

Advanta/rape cases, the two most pro m i n e n t 


“. . . avoidance 

can be 

a very 

practical 

tool for 

developers 

and users 

of GMO 

technology, 

as firms 

have a 

choice.”

“The longtail 

genetic 

pollution 

risks may 

be the most 

potentially 

damaging 

risks from 

a risk 

financing 

standpoint.” 

GMO risk events, will be discussed below. A 

few generalizations can be made. A substantial 

p o rtion of GMO risk financing will be re t a i n e d 

rather than transferre d / i n s u red by GMO firm s . 

Most GMO firms would carry product liability 

insurance, although deductibles/SIRs for larg e r 

f i rms could be in the millions of dollars. If GM 

seeds, crops, or foods cause bodily injuries or 

p ro p e rty damages, it would seem that absent 

some nonstandard exclusion that these claims 

would be covered by products liability 

insurance. While products recall insurance is 

available, most firms do not carry this coverage 

so few of those claims would be insured. 

The business risk of customers not buying the 

p roduct is not insured. Neither are damages 

to a firm ’s reputation insure d . 

StarLink Corn 

The StarLink corn case was discussed 

above, so only the risk financing implications 

will be noted here. Unless Kraft Foods and 

Mission Foods had products recall coverage 

(and the author has seen no reports to that 

effect), then their substantial recall costs 

would not be insured. Kraft and Mission may 

file actions against Aventis but Aventis 

products liability coverage is questionable 

because of restrictions in the definition of the 

property damages, and the impaired property 

exclusion. Voluntary payments by Aventis to 

farmers and grain owners/handlers, because of 

the mixing of StarLink corn with non- 

StarLink corn would not seem to fall under 

products liability or products recall coverage. 

Consumer suits for allergic-type injuries would 

be the most obvious products liability covered 

claim. Farmers claim that their non-StarLink 

corn crops contaminated by a neighboring 

farmer’s StarLink crop could be covered under 

the neighboring farmer’s premises and 

operations coverage or Aventis’ products 

liability insurance. The Kraft recall of 

StarLink corn-contaminated taco shells is the 

first of its kind in the United States and only 

happened in September 2000, so clearly we 

are at the very beginning of the risk financing 

issues. There are a number of insurance 

coverage issues that will need to be sorted out 

in the StarLink and other related cases. 

A d v a n t a / R a p e 

Advanta/rape, the most prominent case in 

E u rope, also happened in 2000, and involves a 

situation similar to the StarLink developments. 

Advanta, a Dutch seed supplier, announced on 

May 17 that some batches of its non-GM 

WINTER 2001 


varieties of oilseed rape, also know as canola, 

which were imported from Canada tested 

positive for a very low-level presence—less than 

1 percent—of Monsanto’s RT73 GM rape. The 

seeds had already been sown in rape fields in 

the United Kingdom, Sweden, France, and 

G e rm a n y. The Swedish and Fre n c h 

g o v e rnments have ord e red farmers to destro y 

a ffected crops while food retailers in the United 

Kingdom are refusing to stock products made 

f rom the affected rape. The British govern m e n t 

has said that farmers will not be able to sell the 

c rop. A spokesman from NFU Mutual, which 

i n s u res two-thirds of U.K. farmers, stated that, 

“It is not clear what liabilities there are in this 

issue and whose they would be, because it is a 

completely new situation.” An Advanta 

spokesman stated that, “We are continuously 

talking to our insure r, but this is new terr i t o ry. ” 

( A l d red, 2000) 

These statements re-emphasize that from the 

standpoint of risk financing and liability 

insurance we are in brand new, unchart e re d 

waters. Farmers would seem to have an action 

against Advanta, although whether their 

p roducts liability coverage applies is 

questionable. Products recall may be impossible 

as the seed is already in the ground—that is, 

this crop may be considered lost. The farm e r s ’ 

case against Advanta could be complicated by 

the fact that the rape seed contained less than 1 

p e rcent GM rape, which is the minimum 

s t a n d a rd for re q u i red labeling. Advanta, of 

course, may have an action against Monsanto. 

Again there are a number of liability and 

insurance coverages issues that will need to be 

worked out. 

L o n g - Tail Genetic Pollution 

The long-tail genetic pollution risks may be 

the most potentially damaging risks from a risk 

financing standpoint. The worst-case scenario 

would be the occurrence of a superbug or 

s u p e rweed or some other deleterious form of 

genetic pollution, but one that took a long time 

to be discovered. The risk financing claims 

could be enormous. One can look at the 

asbestos and Superf u n d / e n v i ronmental claims 

cases to get some idea of what might happen in 

the case of a serious case of genetic pollution. 

The GMO technology firm incurring such an 

action would be subject to extensive discovery 

actions with their own data/re c o rds serving as 

the basis of a liability suit as happened in the 

tobacco litigation. Once the event has 

happened, it would be reasonably easy to 

227


establish foreseeability to prove negligence by 

the GMO firm given the considerable 

opposition, warnings, and questions raised about 

GMOs. Insurers may be somewhat protected by 

claims-made policies, which would limit the 

number of claims to which they must re s p o n d . 

Given that many of the GMO technology firm s 

a re chemical and pharmaceutical firms, they 

may already have claims-made rather than 

o c c u rrence-based coverage in forc e . 

Reputational and D&O Risks 

The damage to a GMO technology or user 

f i rm from a major liability case involving 

serious genetic pollution would be enormous. 

It could be a firm bankrupting event, 

p a rticularly given the limitations on the various 

insurance coverages discussed above. Clearly 

t h e re is no direct insurance for the damage to a 

f i rm ’s reputation, but the financial losses could 

be considerable. D&O coverage may apply if it 

is held that the actions of the directors and 

o fficers in getting involved in GMO 

technology was a wrongful act that caused 

stockholders and/or customers losses. Given the 

newness of all these risk situations, the defense 

costs, both insured and uninsured, would be 

expected to be considerable. 

The Future 

Risk management of GMOs is a dynamic 

p rocess. Additional information, data, and 

evaluations will be re q u i red before the risks and 

benefits of GMOs can be fully measured. In the 

past year, three scientific studies were prod u c e d . 

In April 2000, the National Academies’ of 

Sciences’ and Engineering’s National Researc h 

Council released a re p o rt entitled G e n e t i c a l l y 

Modified Pest-Protected Plants: Science and 

R e g u l a t i o n .(National Research Council, 2000) 

In December, Dr. LaReesa Wo l f e n b a rg e r, an 

ecologist at the EPA, and Dr. Paul Phifer, a 

c o n s e rvation biologist at the State Depart m e n t , 

published a study in S c i e n c e( Wo l f e n b a rger and 

P h i f e r, 2000) that some scientists say is the first 

c o m p rehensive review of the published 

scientific data on GM crops. In Febru a ry 2001, 

a huge decade-long study on enviro n m e n t a l 

risks of GM crops, led by Dr. Mick Crawley, an 

ecologist at Imperial College London, was 

published in N a t u re. (Crawley, et. al., 2001) 

While the reader is encouraged to review these 

studies, the bottom line is that the documented 

risks to human health and to the enviro n m e n t 

to date are minimal. But all three studies called 

for further re s e a rch, re v i e w, and monitoring. In 

essence, while significant GMO risks to date 

228 

have not materialized and been documented, it 

cannot be concluded that risks will not develop 

in the future. Intere s t i n g l y, the studies would 

meet WTO standards and permit imports, but 

may fail the Pre c a u t i o n a ry Principle test under 

the Cartagena Protocol and permit blockage of 

i m p o rts. 

While the exception of the Av e n t i s / S t a r L i n k 

c o rn and Advanta/oilseed rape cases, no other 

significant risk events have materialized 

involving GMOs. As discussed above, both 

these cases are largely unresolved re g a rd i n g 

liability and insurance coverage issues. While 

some insurance coverages will most likely be 

available, it is expected that a substantial 

p o rtion of the financial losses will be re t a i n e d . 

Risk managers of GMO technology and user 

f i rms will need to monitor these two events and 

others that may develop. Risk managers or their 

s t a ff also need to monitor studies on GMO 

risks, such as the three noted above. 

The regulation of GMO products, both 

domestically and internationally, is also 

expected to be a fluid process. The National 

Academies’ report, referenced above, called 

on the EPA, USDA, and FDA to quickly 

come to an agreement on each agency’s role 

in regulating GMO products. The recent 

USDA decision that GM foods could not 

carry the label “organic,” is a proxy for GMfree 

labeling. Legislation to require labeling of 

GM foods has been introduced in Congress 

and some state legislatures. (Mattmiller, 2001) 

International regulations will put further 

pressure on labeling requirements. In addition, 

a panel of international experts, called the 

U.S.–EU Biotechnology Consultative Forum, 

recently recommended safety reviews and 

mandatory labeling for GM foods. (Lueck and 

Kilman, 2000) 

The old adage that the “consumer is king” 

will be important in the development and 

regulation of GM products. The reluctance of 

E u ropeans to use GM products has been noted. 

Lydia Zepeda, a consumer science professor at 

the University of Wisconsin, re p o rts that U.S. 

o rganic sales are soaring in large part because 

of the demand by consumers for foods free of 

GMOs. She also called for consistent 

i n t e rnational labeling standards, which she 

feels will help both GM and non-GM 

p roducts. (Mattmiller, 2001) As in all are a s , 

risk managers need to be aware of changing 

regulations and their impact on the firm ’s risk 

management strategies. 

CPCU JOURNAL 

“. . . risk 

managers 

need to be 

aware of 

changing 

regulations 

and their 

impact on 

the firm’s 

risk 

management 

strategies.”

“Reputational 

and business 

risks 

impact all 

businesses, 

but they 

take on 

an extra 

dimension in 

biotechnology 

firms.” 


The lessons and issues involving the risk 

management of GM crops and foods should be 

applied to related biotechnology areas like 

p h a rmaceuticals and the human genome. 

GM technology in pharmaceutical development 

and human gene manipulation present more 

obvious benefits to consumers than GM food s . 

Elimination of life thre a t e n i n g / d e b i l i t a t i n g 

diseases or reduction of their consequences 

clearly are benefits. Yet the risks also achieve a 

higher dimension. Among these risks are the 

d i rect adverse human side effects of a new dru g 

and the ethical risks associated with 

manipulation of human genes. In addition, 

injuries can result in gene therapy, as shown by 

the death of a patient at the University of 

P e n n s y l v a n i a s ’ Institute for Human Gene 

T h e r a p y. (Adams, 1999) 

Some of the criticisms raised against GM 

c rops and foods have parallels with dru g 

development and human gene manipulation. 

Criticisms were raised against GM cro p s 

because of the potential corporate 

concentration and control of the seed and 

agricultural industries. The term i n a t o r 

technology that produced sterile seeds that 

could not be saved by farmers, particularly in 

developing countries, for next year’s cro p s , 

heightened these concerns, despite the fact that 

Monsanto cancelled its eff o rts with this 

t e c h n o l o g y. While touting the fight against 

world hunger as a benefit, GMO firms were also 

criticized for producing a technology that 

developing countries could not aff o rd . 

Concentration and control issues also are 

being raised in the pharmaceutical and human 

genome areas. Access of information and patent 

questions are being discussed, as well as public 

vs. private development. Indeed the ultimate 

intellectual pro p e rty dilemma may evolve in 

these areas. Clearly the risk management 

challenges are enorm o u s . 

The recent debate between pharm a c e u t i c a l 

companies and Africa over the use of AIDS 

t reatment drugs may be replayed with GM dru g s 

or pro c e d u res. The AIDS epidemic in Africa is 

rampant. AIDS treatment drugs are available 

but unaff o rdable to African countries. They are 

asking that drugs be provided free or at re d u c e d 

prices. African countries also want to import or 

WINTER 2001 

make cheap generic equivalents without being 

subject to patent violations. South Africa 

actually has a law that allows it to do this, 

which is currently being challenged in court by 

d rug companies. Corporations in the United 

States and other developed countries are being 

accused of putting profits before human welfare . 

( C o o p e r, et. al., 2001) 

A similar scenario could develop with GM 

d rugs or genetic manipulations in humans. To 

take a dramatic example, assume a GM 

biotechnology company developed a cancer 

c u re. There would be tremendous demand both 

f rom those countries and individuals that could 

a ff o rd the cure and those that could not. 

P re s s u res could be brought to overt u rn patent 

p rotections. The same criticism of putting 

p rofits before human welfare raised by the 

AIDS debate would be expected to be raised 

with GM biotech firms. In these cases, we are 

talking about ethical and reputational risks of 

epic pro p o rtions. The financial stakes are also 

considerably higher as the world pharm a c e u t i c a l 

market of $350 billion in sales is 10 times that 

of seeds and chemical pesticides, in which 

GM crops are involved. (“Business: Hybrid 

Rigour . . .,” 1999) 

Biotechnology risk management involves 

traditional risk areas like products liability 

and product recall. But it also deals with an 

expanded scope of potential risks that delve 

into ethical, cultural, even religious issues. 

The potential environmental risk of genetic 

pollution differs from say chemical and oil 

spills in that consequences may be irreversible 

and uncontrollable. Traditional cleanup and 

restoration techniques may not be effective 

against genetic pollution. Reputational and 

business risks impact all businesses, but they 

take on an extra dimension in biotechnology 

firms. 

Clearly biotech risks must be managed fro m 

a global perspective. Various international trade 

rules and protocols must be observed. Biotech 

f i rms face both critical domestic and 

i n t e rnational regulations. Finally, biotechnology 

is a dynamic and evolving scientific and 

business endeavor. As biotechnology is at the 

cutting edge so too must biotechnology risk 

management be at that edge. 

229


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