Is cannabis the next insurance opportunity?

Man holding a marijuana leaf. The legal cannabis market was conservatively valued at slightly more than $15 billion in 2020 and is projected to surpass $30 billion by 2024. (Photo: Alex Reynolds/Shutterstock)

It was not long ago the idea of cannabis as a legitimate industry was snickered at. Even now, the mention of marijuana causes some to crack a smile derived from years of regarding the plant’s user base as humorously forgetful and listless.

Bucking the stereotype of being lackadaisical are the incredibly fast-growing businesses that comprise the U.S. legal cannabis market, which is conservatively valued at slightly more than $15 billion for 2020, according to Marijuana Business Daily. Projections have sales surpassing $30 billion by 2024, with some going as high as $37 billion.

If those 2024 estimates fall on the conservative side, the U.S. legal cannabis market would still outpace annual craft beer sales and generate more revenue than toothpaste, hard seltzer, and the NBA combined, the trade publication reported.

While it is growing robustly, there is still limited data on claims from the cannabis industry, according to TJ Frost, U.S. cannabis segment leader for Hub International Ltd. He noted the company is currently working with about six years of data.

Federal prohibition driving hesitancy

As with everything in the cannabis industry, the appetite among insurers to write policies is in constant evolution. However, many more clarity on legalization at the federal level will ease apprehensions.

“I have daily conversations with carriers trying to get into this market, and it always falls back to not being federally legal and most carriers being owned by banks,” explained Frost. “There are a good number of carriers out there in the industry, but there could always be more and with better rates.”

While federal legalization has been difficult to pass into law, Rocco Petrilli, chairman of the National Cannabis Risk Management Association (NCRMA), says the continued activity by states will force the federal government’s hand.

Applying additional pressure on the federal government were the November elections, which saw five states added to the list of those that have some form of legal marijuana. Those new states include deep-red South Dakota, which became the first in the nation to go from complete prohibition to an adult-use market.

The U.S. House of Representatives tipped its hand a bit in early December with the passage of the Marijuana Opportunity Reinvestment and Expungement Act, which would remove cannabis from the list of scheduled substances and eliminate criminal penalties for distribution, manufacturing and possession of marijuana. The act would also allow legitimate cannabis businesses to access loans and services rendered by the Small Business Administration and impose a 5% tax on cannabis products, among other changes. Proponents admit it has slim chances of being taken up by a Republican-controlled Senate.

Morgan Fox, media relations director for the National Cannabis Industry Association, said the bill did have broad support, though, including from some conservative members of the House, and garnered more than 120 co-sponsors.

“We are more likely to see incremental reforms in the Senate, namely the Safe Banking Act and possibly removing some barriers to research,” Fox maintained. “That being said, the elections really sent a clear message to lawmakers that not only are their constituents ready to support cannabis reform, it is something their constituents want.”

‘It’s about inclusion, not exclusion’

Today’s market is still seeing upwards of 30 insurers and managing general underwriters, as well as some native carriers and captives, serving it, according to Ian Stewart, founder and chair of the national cannabis and hemp law practice at Wilson Elser.

“The good news is the cannabis insurance industry has come a long way in a short time. These days it is not so much about whether companies can obtain coverage, but more about what lines are available and the limits,” Stewart said. “The variety of insurance vehicles is expanding.”

He explained the market currently has pretty good options for certain types of property and casualty lines, including general commercial and product liability. As perhaps can be expected, pricing is a bit more expensive than for comparable sectors, but Stewart said it “isn’t totally out of whack like it was a few years ago. We have more loss history now and understand how the industry works better.”

Petrilli indicated what the market is hungry for is not just quantity but rather higher-standards in coverage.

“There are coverages available, and they are getting better, but the big need out there is quality coverage that is fairly priced and priced on the amount of coverage the policy gives,” he said. “It’s about inclusion, not exclusion. We are all aware of those initial horror stories of agents writing coverage for cannabis businesses that included cannabis exclusions.”

He added the industry also experiences something of a catch 22: Since federal prohibition is on-going, many banks simply can’t touch the sector, in turn cutting some big insurers out of the picture.

“Particularly on the reinsurance side, which has impacted capacity. There certainly has to be more inclusion and pricing policies more fairly on the internal risks of the business, not just the external risks,” Petrilli said. “Where this tsunamis of external risk came from is people associating bad things with the word cannabis. The fact is these are very legitimate businesses. If you look from a regulatory and licensing standpoint, these companies are more adequately set up than a lot of other businesses.”

He added a shift in mind frames is needed to properly assess risk in the cannabis industry.

“That’s really where NCRMA comes in because none of these changes are going to happen without education,” he said. “Our mission statement is to make sure that not only are the cannabis operators educated, but that the insurance industry is as well.”

The NCRMA offers a captive insurance product for its members, which was developed because the association couldn’t “see a way clear in the current market to influence the fact that our members needed not just coverage, but quality coverage,” Petrilli observed.

Hard to find coverages

Some of the more difficult coverage types to write for cannabis businesses are employment, cyber, and other E&O policies and specialty lines, such as crop coverage, according to Stewart, who noted indoor crop coverage is available.

“Outdoor crop coverage remains a problem and reinsurance, while excess insurance is there, those markets have pulled back some,” he said, adding: “There are still problems with limits across lines. As these companies are growing quickly, it makes it hard to find adequate coverage.”

These fast-moving companies are often managed by people with more passion for the industry than experience running a business, particularly ones that can scale up as rapidly as those in the cannabis space. This results in some management teams being “a little bit over their skis,” according to Stewart, who explained this creates difficulties when writing D&O policies. He explained that as these companies go public, they typically see leaps in D&O policy pricing.

“Carriers are spooked, and for good reason, because they don’t know how to underwrite these businesses,” he added. “As these companies grow, and regulatory issues become easier to operate with, prices will come down. There is still going to be exposure because of the nature of these businesses, but it will look more natural in a year or two than it does now.”

Auto, product liability & lingering issues

An issue growing in stature involves auto policies, particularly for businesses with delivery services. Adding pressure is consumers’ growing reliance on delivery services during the pandemic.

When it comes to companies with delivery, whether between production facilities or direct to consumers, Petrilli says the challenges come from what operators aren’t seeing.

“So many dispensaries have vehicles on the road that aren’t properly covered, and they aren’t aware of it,” he said. “We find it daily in the people we talk to. The attachment to cannabis makes the type of auto coverages these dispensaries need either overly expensive or even cost-prohibitive.”

Exacerbating auto policy issues is the difficulty in drawing direct correlations between consumption and level of intoxication. Unlike alcohol, which is flushed from the system in around 48 hours, fat-soluble Tetrahydrocannabinol (THC) can linger in the system for weeks and in some cases, depending on the user’s metabolism, a month after intoxication has worn off.

This makes gauging the accuracy of roadside sobriety tests difficult. Similarly, this could impact workers’ comp claims when considering if marijuana intoxication was a contributing factor to a work-site accident.

However, technologies are being developed to more accurately determine the level of intoxication, and law enforcement agents are being trained on new techniques to detect if someone is high. (See Crash risk & driving high below)

In addition to auto issues, the cannabis industry had to contend with an early product liability nightmare. Dubbed Vape Gate, the situation began developing in late August 2019 with consumers being hospitalized with lung injuries tied to vaping THC-containing products.

“For about four months, the CDC and FDA were investigating, and during that time, the cannabis insurance industry pivoted quickly to add exclusions to product liability policies for any unapproved or illicit additives,” Stewart said. “We know now, with a very few exceptions, the vape-related injuries were due to black market products, though.”

Frost said product liability rates are increasing but explained those upticks were not specific to the cannabis industry and are the product of an overall hardening market.

“The bottom line is there is still some apprehension around writing vape or vaping related risks, but insurers are optimistically cautious,” said Jay Virdi, chief sales officer for Hub International’s cannabis insurance and risk services in the U.S. and Canada. “It is going to take cooperation between the cannabis industry and regulators to get their confidence back.”

While the complexities surrounding cannabis are constantly shifting, Petrilli stressed the answers can be found by staying educated on the latest developments.

“It is an immature industry, but a product that has been around for a long time, so there is going to be a natural learning curve that happens,” he said. “It might be painful some time. To lessen that pain, make sure you are educated and surrounded by people that have your best interests in mind.”

Marijuana bud and car keys. What risk do drivers under the influence of marijuana pose to others on the road? (Photo: Alex Reynolds/Shutterstock)

Crash risk & driving high

In the late-night comedy classic “Up In Smoke,” Cheech Marin asks how he is driving, to which his comedic counterpart replies languidly, “I think you’re parked, man.”

While that situation ended with a laugh, playing particularly well during the days of slacker 1970s’ OVI laws, does it bear any semblance in reality? Are high drivers gingerly going along, more nuisance than reckless?

It is a question Ian Stewart, founder and chair of the national cannabis and hemp law practice at Wilson Elser, has been asked.

“It is not safe,” Stewart said, explaining some people are interested in comparing stoned drivers with drunk drivers. Stressing how unsafe driving high is, he said you can compare it to other risks.

“If a driver has a 0.08 blood alcohol content (BAC), it is about a five-time crash risk multiplier,” he shared. “A 0.2 BAC, which is pretty darn drunk, increases it about 20 times. Pot without any other drug use, as best they can tell, is about a two-time multiplier.”

Texting while driving is a 23-time multiplier, he added.

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