“This is the new gold rush.”
So says Matthew Porter, vice president of Brown & Brown Insurance Services of California, regarding the surge of investor interest in the production and distribution of cannabis and products derived from cannabis.
“A lot of people are pouring a lot of money into cannabis,” he says. “It’s a whole new industry, and it offers the opportunity to be at the forefront, to be a pioneer.” That applies to insurance for commercial cannabis operations as well, he adds.
As of December 2018, Marijuana Business Daily, a web portal devoted to the cannabis industry, listed more than 60 insurance organizations offering property or liability coverage for cannabis operations wherever legal in the United States, with many others operating within individual states.
The growth of a cannabis insurance industry comes in the wake of marijuana legalization across North America. In October 2018, recreational use of cannabis became legal throughout Canada. A month later, legal sales of recreational marijuana began in Massachusetts. Today, at least nine states permit non-medicinal use of cannabis.
“It’s only a matter of time before the federal government realizes how much tax money it is losing out on. When cannabis becomes legal at the federal level, then all bets are off.”
Brown & Brown Insurance Services
In the November 2018 elections, voters approved marijuana legalization in Michigan and relaxed restrictions on marijuana in several Ohio and Wisconsin municipalities. Voters in Missouri and Utah added those two states to the 27 that allow for medicinal use of cannabis, while voters in North Dakota rejected a referendum to legalize recreational marijuana use.
To date, U.S. federal law still categorizes cannabis as a “Schedule 1” controlled substance that is illegal to possess or use without special authorization. That puts marijuana in legal limbo and acts as a drag on investment, but Arcview, a research firm serving cannabis investors, projects the U.S. market for cannabis will double, to $23 billion in revenue, by 2020.
There are several measures in Congress for relaxing federal restrictions on marijuana, and President Donald J. Trump has indicated at least tentative support for one of them. Porter believes the pace of state legalization and the prospect of a new source of excise tax revenue will lead to federal action.
“It’s only a matter of time before the federal government realizes how much tax money it is losing out on,” he says. “When cannabis becomes legal at the federal level, then all bets are off.”
How big a market?
All bets are not sure bets, however. Until its legal status is fully clarified and a market for recreational marijuana is allowed to mature, we won’t know whether the market for cannabis coverage will be at all comparable to that for alcohol and tobacco. As it is, Arcview’s projection of a $23 billion cannabis market would be only 10% of the estimated $233 billion Americans currently spend on alcohol, and less than 30% of what Americans currently spend on cigarettes.
Moreover, individuals seem to lose their desire for cannabis as they age, at least while the substance remains illegal under federal law. A survey by the federal Substance Abuse and Mental Health Services Administration found that, in 2015, while 46% of survey respondents aged 26 or older reported using marijuana at least once in their lifetime, only 10.4% had in the past year, and 6.5% in the past month.
In contrast, 69.9% indicated they had used tobacco in their lifetime, with 25.8% and 24.5% reporting use in the past year and month, respectively. The percentages were even more pronounced for alcohol use: 87.1% reported some use in their lifetime, 69.2% in the past year, and 55.6% in the past month.
Crop coverage plus liquor liability
If the federal government legalizes marijuana, Porter predicts “the big ag insurers are going to come into the market. Cannabis is a crop,” Porter emphasizes, “and crop perils are key causes of loss to marijuana producers.”
According to Porter, most of the emerging property policies for cannabis operations cover losses to marijuana products caused by standard property perils and perhaps some spoilage perils, but few of them cover loss to growing plants by crop perils.
“A cannabis grower can lose an entire harvest to powdery mildew,” Porter notes, “but most insurers won’t insure growing plants.” Brown & Brown, which provides access to crop coverage, recently settled a cannabis crop claim in excess of $5 million.
In addition to the crop exposure (for growers), marijuana risks stand apart from other enterprises in that they have an exposure similar to that of alcohol vendors for damage and injury caused by individuals impaired by the use of their product.
Given that, Porter anticipates that recreational marijuana will be marketed through stand-alone cannabis vendors “for the foreseeable future,” and that it may be many years before one sees cannabis and alcohol marketed together, or cannabis products stocked in general retail outlets.
“Cannabis risk can vary drastically from carrier to carrier, depending on the products and services of its insureds.”
Vice President of Inland Marine and Commercial Lines
As an indication of the current profile of the marijuana market, Colorado-based Cannabis Insurance Company identifies six types of cannabis business risks: cultivators, laboratories, buildings, manufacturers (of derivative products), dispensaries, and transport-delivery operations. Like other carriers and intermediaries serving the market, Cannabis Insurance offers a range of property and liability coverages customized for cannabis operations.
Given the short history of the market, Porter says that uncertainty about claims severity is driving rates beyond what many cannabis startups can afford, leaving them with coverage that is far less comprehensive than they hoped to have. As one example, he cites an operation with $30 million in annual sales that was quoted $240,000 for product liability insurance; it declined and opted to retain the risk.
So far, at least, product leaders for Burns & Wilcox have found claims for cannabis operations to be in line with those for other types of businesses. Like Brown & Brown, Burns & Wilcox provides coverage on a “seed to sale” basis for a wide range of cannabis operations.
“Our loss experience has been very comparable to that in other industries,” says John Deneen, commercial underwriter for Burns & Wilcox. “Most property losses have been tied to catastrophes or weather-related events. Even as the cannabis industry continues to grow at an unprecedented rate, the losses have been minimal.”
As for liability claims, Deneen says that most are for “slip and fall type liability, which is not unique to businesses selling or manufacturing cannabis.”
“We are optimistic this trend will encourage other carriers to step into the cannabis space,” says Jason Sawin, excess and surplus lines property broker for Burns & Wilcox Brokerage.
For the time being, the carriers most likely to step into the marijuana insurance business will be surplus lines markets, as a fledgling cannabis market operating in a legal patchwork holds little attraction for more heavily regulated admitted carriers.
Golden Bear Insurance is writing cannabis coverage on an admitted basis in California, but Porter finds accounts turning to Brown & Brown’s E&S offerings when they cannot get the limits they seek from Golden Bear. “Admitted carriers cooperate under more restrictions,” he says. “It’s easier to create towers and different coverage structures in the surplus lines market.”
To promote participation by admitted carriers in the marijuana market, the California insurance department in 2017 invited property/casualty organizations to submit filings of policy forms and manual rating information for insuring cannabis operations on an admitted basis.
In response, the American Association of Insurance Services (AAIS), a not-for-profit advisory organization based in suburban Chicago and operating nationwide, filed a Cannabis Businessowners Policy (or “CannaBOP”) program of forms, rules, and loss costs designed especially for legal cannabis enterprises.
The CannaBOP program provides a property-liability package policy with open perils property coverage and occurrence-based liability coverage for licensed California cannabis operations with up to $5 million in annual revenue. Among the program’s features developed to address cannabis exposures are:
- Detailed definitions of “cannabis,” “cannabis activities,” and “cannabis accessories” that establish the extent and limitations of coverage;
- Provisions requiring, as a condition of coverage, that the chain of custody for cannabis be traceable using a “cannabis activity tracking” system compliant with all applicable California laws, rules, and ordinances;
- Exclusions of coverage for certain activities, including cannabis delivery services; and
- Limitation of the coverage territory to California.
“Cannabis risk can vary drastically from carrier to carrier, depending on the products and services of its insureds,“ says Robert Guevara, AAIS vice president of inland marine and commercial lines. “For property, there is heightened exposure to total loss by fire, explosion, infestation, and spoilage, as well as exposure to breakdown of specialized equipment used in cannabis extraction and when manufacturing edibles.
“Also, exposure for product liability and product recall affects the entire chain of production, creating both first- and third-party claims.”
To date, there are no carriers writing the CannaBOP, but AAIS has received numerous inquiries about it, says Guevara. The organization plans to file the program in Colorado early in 2019, and to follow that with filings in Massachusetts, Michigan, Nevada, and New Jersey. Although it was developed as a filed program for admitted insurers, surplus lines carriers and MGAs can also use it as the basis for a commercial lines marijuana program.
“The cannabis insurance market is growing in terms of the number of companies and brokers competing for business, as well as capacity and complexity of risks that insurers are willing to take on,” says Deneen. “The market will continue to grow as the country heads towards common acceptance of cannabis, which is not entirely dependent on federal legalization.
“Brokers and agents should recognize that while the market is competitive, it’s also in a constant state of flux,” he adds. “The market is constantly evolving, which can be both a benefit and a drawback. The drawback is that a competitive program today can be obsolete in six to 12 months, but that can be a benefit to those who are nimble and financially stable.”
Author: Joseph S. Harrington, CPCU. “Cannabis Insurance” The Rough Notes Company, Inc., January 29, 2019