CANNABIS INSURANCE
As marijuana legalization advances, is it time for agents and brokers to prepare to cover cannabis?
By Joseph S. Harrington, CPCU
“Happy days are here” for cannabis sellers and users, says cannabis insurance specialist Erich Schutz, borrowing from the famous tune celebrating the end of alcohol Prohibition.
As of January 2021, following referenda in four states legalizing recreational use of cannabis (and a fifth allowing medicinal use), marijuana and other forms of cannabis were fully legal (though regulated) in 16 states. Also, cannabis use was decriminalized and/or authorized for medical use in 28 other states, with only six states left that prohibited it entirely.
Cannabis remains a “Schedule 1” narcotic prohibited under federal law, however. While actual enforcement of the ban has been relaxed, its existence effectively throttles the development of interstate arrangements for financing and insuring cannabis enterprises.
Schutz, a broker, underwriter, and risk manager for The NIF Group, a JenCap company, is not confident about the prospects for federal recategorizing of cannabis, even with Congress and the president under the control of cannabis-friendly Democrats.
He is nonetheless bullish on the prospects for the industry as Congress seems poised to lift restraints on financing for the sector. On at least three occasions since 2019, the U.S. House of Representatives has passed a measure allowing financial institutions to serve cannabis businesses, but the proposal remained stalled in the Senate.
While actual enforcement of the ban has been relaxed, its existence effectively throttles the development of interstate arrangements for financing and insuring cannabis enterprises.
Legal access to mainstream banking services will “immediately change the game for cannabis producers and distributors,” Schutz says. “Investors and entrepreneurs have been chomping at the bit for this very moment. Say goodbye to sale-leasebacks and hello to mortgages, lines of credit, and large cash infusions. This will lead to massive vertical integration, consolidation and expansion into new states.”
Keith Distel, casualty team leader and marijuana liability specialist for Admiral Insurance Group, a Berkley Company, agrees that 2020 was a “hallmark year” for the cannabis business. Apart from its success at the ballot box, Distel notes that cannabis operations were widely recognized as “essential” businesses allowed to remain open during lockdowns ordered in response to the COVID-19 pandemic.
“The negative stigma of cannabis is slowly but surely being erased,” Distel says. In light of that, he sees the cannabis business “poised for tremendous growth and expansion.”
Producer positions
Given how rapidly cannabis has come to be regarded as a legal and socially accepted substance, insurance agents and brokers need to determine whether it is worthwhile or even imperative to learn about coverage for cannabis.
There is still a substantial gap between the perceived potential for cannabis sales and the current reality.
Cannasure Insurance Services, an insurance intermediary focused on cannabis, estimates that legal sales of cannabis products in the U.S. could triple over five years, from at least $10 billion in 2019 to more than $30 billion in 2024. That would exceed the level of sales for craft beer and prescription pain medications, but still fall well below the volume of sales for alcohol and tobacco.
For the time being, both Schutz and Distel see cannabis business remaining as a specialized area of coverage with little application to general retail marketing.
“Until cannabis is treated as a normal commodity it will always require a specialist focus,” says Schutz. “The market is too small, coverage is too restrictive, and operations are so nuanced from state to state that cannabis coverage needs to be a specialty play until there is full legalization at the federal level and complete normalization of cannabis use in society.”
In short, we’ll rarely see pot sold next to cigarettes and alcohol for the foreseeable future.
Insurance professionals seeking to capitalize on new opportunities in cannabis need to understand that the fundamentals of coverage are still being established.
Given how rapidly cannabis has come to be regarded as a legal and socially accepted substance, insurance agents and brokers need to determine whether it is worthwhile or even imperative to learn about coverage for cannabis.
“Mature insurance products, such as those addressing alcohol and tobacco, have standards and rules in place,” says Distel. “The cannabis market is still close to being the Wild West, where rules are being made as we push forward.”
In its review of the U.S. cannabis insurance market, New Dawn reports that “covers are limited and products are basic, while conversely premiums are high.”
Exposures
In contrast to outlets marketing alcohol and tobacco, “cannabis distributors sell products with a high street value, deal with lots of cash, are subject to seizures and raids, and can have their licenses suspended or revoked over the slightest hint of an infraction,” Distel says.
In response to the pandemic, many cannabis distributors were granted regulatory approval to implement deliveries. This led to a growth in sales, but also increased risk, Distel adds.
“Dispensaries effectively had to take point-of-sale systems and high security measures on the road, increasing the likelihood of hold-ups, thefts, and third-party bodily injury claims,” he says. “Finding viable, affordable commercial auto insurance became a high priority for cannabis operators in 2020.”
The cannabis industry’s restricted access to mainstream financing contributes to its relatively high volume of cash transactions, which in turn makes cannabis distributors prime targets for theft, says Schutz. That exposure is only partly offset by strict regulations on safety and security for cannabis dealers, he says, adding that “the West Coast market was impacted quite a bit in 2020 by theft and damage from riots, civil commotion, and burglaries.”
Growers themselves are exposed to wildfires and environmental hazards, Schutz adds, noting that private insurers do not have a “robust” solution for outdoor cannabis exposure, and that coverage under the federal crop insurance program is out of the question (except for hemp) unless and until cannabis is fully legal under federal law.
For agents interested in the opportunities avail-able in cannabis, Jim McErlean, Cannasure’s director of business development, advises that they gain knowledge and establish contacts through local and national industry associations such as the National Cannabis Industry Association.
“Those interested in fully immersing themselves in the cannabis and hemp industries can become coverage specialists and gain direct access to specialty programs with cannabis MGAs,” he says. “To supplement our agents’ knowledge, we have a relation-ship with every one of them to fully understand the clients’ operations and how to best protect the clients’ assets with unique coverages.”
For more information:
Admiral Insurance Group
www.admiralins.com
Cannasure
www.cannasure.com/agentguide
JenCap
www.jencapgroup.com/cannabis
The author
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.
