Insurance Companies are Preparing for Federal Legalization
Federal legalization of cannabis has more support than ever before, and many are diligent pursuers of the cause. Financial benefits are innumerable and the reach of such a move would spread far beyond businesses that are immediately tied to the industry. In light of this progress, one trade is preparing for what is hopefully inevitable: insurance. With a prospective ten-fold increase in sales, legal cannabis insurance companies are a honeypot waiting to be opened.
Trackable cannabis sales in the United States surpassed $17.5 billion in 2020, up from $12.1 billion in 2019, per Colorado-based cannabis research firm BDSA, however, cannabis insurance carriers only wrote about $250 million in policies last year, insurance agents estimated for Reuters, with a handful of carriers offering limited property and liability coverage. Coverage is also needed for crops and theft, along with larger payout limits, according to the multiple insurers, brokers, agents, lawyers and cannabis business owners interviewed by Reuters. “There is an overwhelming need for the right kinds of insurance,” said Rocco Petrilli, chairman of the National Cannabis Risk Management Association (NCRMA). BDSA expects some form of federal legalization in 2022, and Petrilli said that could send insurance sales to cannabis businesses to more than $3 billion over the next five years if the industry were insured like normal businesses.
Legal Cannabis Insurance Companies
Expanding cannabis insurance companies and their available options would likely lower rates as well as provide peace of mind. Some dispensary owners have noted their premiums are 20% to 30% higher than ordinary retailer payments. Directors and Officers liability insurance, typically known as D&O insurance, crucial for attracting seasoned business leaders and raising capital, is also expensive, said Gavin Kogan, CEO of Grupo Flor. He said he pays $85,000 to $100,000 annually for $1 million of D&O protection, “and the coverage is super limited.”
As insurers are regulated at the state level, they are permitted to offer coverage in states where cannabis is legal. In April, NCRMA set up a captive insurer to offer coverage for property, general premises liability and product liability to members. Some large insurers offer coverage via subsidiaries, although it is essential to be aware of specifics in a policy. For example, carrier Progressive notes its vehicle policies cover liability and physical damage in states that have legalized transport of cannabis, but it does not insure the cargo itself.
Currently, upwards of 30 surplus line carriers and several managing general underwriters service the cannabis industry. Additionally, a small handful of admitted carriers operate in California and Arizona. It is now easier to obtain coverage than ever before but, as mentioned, the policies remain more expensive than policies purchased by similarly situated companies in other markets. Other cannabis coverages have shown steady improvement, such as auto, pollution, indoor crop, crime and fidelity. A key aspect of preparing for federal legalization of cannabis within the insurance industry is to identify coverage unique to the trade and prepare policies to be executed immediately.
Cannabis Insurance Industry Growth
On the upside, several developments have helped speed the growth of the cannabis insurance industry over the past few years. For one, legalization in Canada paved the way for international insurance markets to enter (or re-enter) the space, and provided a means for developing the underwriting skills and metrics needed for eventually entering the riskier U.S. market. Further, under the current and past two administrations, the federal government has exhibited no interest in prosecuting plant-touching or ancillary companies engaged in state-compliant commercial marijuana activity. Relative to the insurance industry in particular, there have been no reports of federal action taken against any insurance company or broker doing business with state-compliant marijuana businesses.
Drought has pushed the issue of adequate insurance coverage for an industry near to cannabis: hemp. Federal agriculture regulators have authorized emergency practices to assist agricultural crop producers affected by extreme drought conditions. Part of these emergency practices include the USDA’s Risk Management Agency (RMA) working with crop insurance companies to streamline payments to policyholders in drought areas. The agency is extending crop insurance deadlines, allowing more time for payment, and authorizing approved insurance providers to waive interest fees on Written Payment Agreements for an additional 60 days.
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