LEGAL CANNABIS: WHERE WE ARE AND WHERE WE’RE GOING

The industry offers both challenges and opportunities

By Patrick McManamon

If you’ve been looking to target an industry that is emerging, exciting, and guaranteed to be around for the foreseeable future, the cannabis industry is a niche to consider.

According to Gallup, 66% of U.S. adults supported marijuana legalization in 2019, compared to only 31% who supported it in 2001. Partly because of this greater acceptance, investment has soared.

With due diligence, you can help foster an exciting and expanding industry.

And the legalization map keeps growing. On January 1, 2020, Illinois became the 11th state where recreational cannabis can be legally sold; in 33 states, medical use is legal.

This growth presents an opportunity for agents and brokers who want to jump in early, and many already have. Just a few years ago, cannabis entrepreneurs struggled to find basic insurance coverages. According to Marijuana Business Daily, as of December 2018, some 60 insurers of cannabis were operating in multiple states—and many others were active in individual states—offering a wide array of coverage options.

That said, many challenges confront cannabis-related businesses as they navigate between federal and state regulations.

Downturn

The excitement of the “green rush” peaked in 2018. Cannabis-related companies raised nearly $13.8 billion, compared to just $3.5 billion in 2017, according to data from Viridian Capital Advisors.

But 2019 saw a significant downturn. According to a December 2019 CNBC article, the six largest publicly traded cannabis companies lost a collective $25 billion in market value, and several of the largest players in North America (Aurora, Tilray, HEXO, Pax Labs, Eaze, CannTrust, and MedMen) had to lay off sizable portions of their workforces, according to a February 2020 Benzinga article.

Inconsistent regulations, mismanagement, high barriers to entry, and media backlash from vaping illnesses all factored into the downturn. In addition, slow retail sales in some major markets, like Canada and California, and difficulty raising capital, served to exacerbate the situation.

The cannabis industry has weathered the storm, and many experts see the downturn as simply a correction. Indeed, the top cannabis stocks are still trading at a higher value than their initial price, according to a September 2019 HowMuch.net article.

Michael Dundas, president of Sira Naturals in Massachusetts, believes the downturn is temporary and that investment will come back as investors gain a deeper understanding of the emerging opportunities.

“When you dig into actual company operations across the industry, there are substantial opportunities for investment,” he says. “Valuations are down, but product demand is still robust, and there are many companies with strong fundamentals. This strikes me as a recipe for recovery.”

Here are some signs of a bright future for the industry:

• Facility size is growing. According to the Cannabis Business Times (CBT) 2019 State of the Industry Report, respondents’ facilities averaged 34,700 square feet, 9,100 square feet more than 2018 respondents’ facilities (25,600 square feet). Of the research participants, 57% reported operating 10,000 square feet or more of canopy space, a big jump from the 2016 report that saw only 37% of respondents at that scale.
• The CBT 2019 report also found that indoor growing is decreasing significantly while outdoor and greenhouse growing are slightly increasing. Indoor operations dropped by 21% during the past three years, with 59% of cultivators reporting growing indoors. Green-house and outdoor growing increased by 4% and 5%, respectively. This is a positive sign because growing an agricultural commodity outdoors and in greenhouses is much more sustainable for the future of the industry.
• Legalization is on the rise. The market will continue to expand as more states and countries legalize cannabis. In 2019, 40 countries legalized medical cannabis, with more expected to do so in 2020.

Cannabis insurance realities

When deciding whether to insure a cannabis business, agents and brokers should keep some key points in mind.

First, make sure the prospect is staying on top of state regulations. Regulations on cannabis often work in favor of risk management, because they focus on areas like security, supply chain, delivery, quality control, testing, reporting, and record keeping. When regulations are constantly changing, however, it can be hard for operators to stay in compliance.

Make sure the operator cares about consistency and standardization of the product. A result of changing regulations is a lack of standardization. This often leads to product liability losses—the biggest cause of cannabis insurance claims. The American Society for Testing and Materials (ASTM) is developing standards for multiple aspects of the cannabis industry, including auditing, quality management, processing, and handling. This may help state regulators across the nation create steadier compliance environments.

Make sure to work with businesses that conduct research related not only to their products but also to their supply chain. Research is crucial for illuminating new cultivation methods, sourcing new products or suppliers, and learning about new cannabinoids (compounds closely related to cannabis that include cannabinol and other active constituents), improved drugs, and ideal plant genetics for regional conditions. Because of the Agriculture Improvement Act of 2018, also known as the “farm bill,” double-blind, placebo-controlled studies of hemp-derived CBD are now a possibility. In addition, last September the National Institutes of Health (NIH) announced a series of grants to study lesser-known compounds. More data will only help an industry that for decades has been prohibited from working with federal research institutions.

Because of the vaping crisis of 2019, operators need to thoroughly vet their suppliers. Imported vape batteries and cartridges vary greatly by manufacturer. Operators need to document their product specifications, work with manufacturers that are GMP/ISO-certified, and test the products before they are shipped.

Stay the course

Federal legalization of cannabis unquestionably would stabilize the industry. Not only would banking, trade, and research be easier, but major agricultural insurers would finally be able to offer crop insurance, whereas many cannabis insurers today will not.

While we wait for stabilization, cannabis businesses need to think ahead and be ready to pivot when necessary. Khadijah Adams, a cannabis investor and consultant with C.E. Hutton in Colorado, says, “The market will correct itself with federal legalization. … Brokers should be aware of the types of cannabis businesses, the amount of risk involved, do theft analysis, review employee safety and training, and gauge the profitability of the company,” he concludes.

With due diligence, you can help foster an exciting and expanding industry.

The author

Patrick McManamon is a pioneer in the cannabis and hemp insurance industry. The founder and CEO of Cannasure Insurance Services, LLC (Cannasure), Patrick is a highly recognized insurance thought leader in all sectors of the cannabis and hemp industry.

Patrick’s expertise keeps him busy and sought after to speak at insurance and cannabis and hemp events, advisor to state regulators and frequently interviewed for his position or thoughts on industry trends by media outlets and publications.

Prior to Cannasure, Patrick was the President of McManamon Insurance, a third-generation insurance group located in Cleveland, Ohio, where he guided the growth of the company in the emerging markets.

Patrick is a graduate of the University of Dayton with a degree in political science.