The cannabis sector is poised for powerful growth as more U.S. states line up to green-light the popular plant.
According to Hub International's "What to Expect In 2024” cannabis outlook report, medical marijuana is now legal in 20 states and in the District of Columbia, while recreational cannabis is eligible for sale in 23 states along with D.C. Retail cannabis sales are expected to increase to $54 billion by 2027, Hub International reported.
Yet the buzz wears off somewhat given the business risks associated with growing and marketing cannabis in 2024.
“Losses related to catastrophic events such as fires, particularly those caused by a failure of High Intensity Discharge (HID) lighting systems used to grow crops, or theft of expensive cannabis products like cannabis oil, present further challenges to profitability,” the report noted. “And a rapidly spreading plant pathogen called HLVd could cost cannabis growers billions of dollars in coming years.”
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Risk, Legislation and Lack of Industry Knowledge Vex Insurers
What do cannabis companies and industry insurers need to do to curb business risks and create insurance policies for all market participants?
“The current state of cannabis business insurance is quite restricted, with limited insurers willing to participate due to the high-risk perception and regulatory complexities,” says John Crist, founder of Prestizia Insurance.
Cannabis businesses, particularly cultivators and retail stores, often struggle with obtaining adequate coverage. That’s partly by design, as insurers weigh the risks of offering coverage in such a nascent marketplace.
“Best practices for these businesses include maintaining stringent compliance with state regulations and demonstrating a thorough risk management strategy,” Crist says. “For instance, a cannabis retail client in New York had to implement extensive security and inventory tracking systems to meet insurance requirements, underscoring the meticulous level of compliance needed.”
Another New York-related issue is that a New York state bill requiring medical cannabis to be covered by insurance plans could significantly affect the market, potentially leading to more widespread insurance adoption and possibly more insurers entering the market.
What other big issues are facing insurers contemplating initiating or expanding cannabis insurance coverage? Here’s a closer look:
Lack of sector knowledge
“One of the biggest challenges for new agents is the ability to learn and understand the business and marketplace,” says C.L. Mike Schmidt, an attorney with Schmidt & Clark, whose specialties include cannabis law. “The cannabis insurance sector is relatively small on the excess and surplus side, with well-known, established agents, brokers and underwriters. Therefore, selling oneself as a professional who understands the nuances is vital to breaking in.”
Need to know the “ins and outs”
“It’s much more than your standard, typical excess and surplus (E&S) risk,” Schmidt says. “There are a lot of ins and outs that an agent should attempt to learn to be well-equipped to serve their clients. When it comes to underwriting the risk, agents must comprehend that most policies are written on proprietary endorsements, so knowing the ins and outs of each carrier’s form is critical.”
Under-the -radar risks
“The cannabis industry is a unique one to navigate in insurance as carriers must accommodate unique risks,” Schmidt says. “It shares common business risks with the consumer packaged goods market, overlaps with some pharmaceutical risks and has some wholly individual challenges like federal prohibition.”
“High-risk activities such as cultivation facilities housing thousands of dollars’ worth of products, transportation companies facing the open road while loaded with products and dispensaries moving large amounts of cash daily are not limited to a few smaller businesses — they spread across the industry,” he says.
The “Schedule 1” issue
“As of now, cannabis remains a Schedule I drug at the federal level in the U.S., which significantly impacts its legal status and the operational dynamics of businesses within the industry,” says Amber Benka, an agent at California Insurance Co. “The classification means it’s considered not accepted for medical use and has a potential for abuse, complicating banking, taxation and interstate commerce.”
The U.S. Food and Drug Administration (FDA) has recommended reclassifying cannabis as a Schedule III substance.
“This reclassification could potentially reshape the industry’s regulatory framework, impacting financial reporting and taxation,” Schmidt says. “However, this is still under consideration, and the final decision is made by the U.S. Drug Enforcement Administration (DEA).”
Local government policies
The insurance marketplace remains active, but it may be difficult to obtain insurance within the limits required by leases or local governments.
“For example, some cities want dispensaries to have $2 million in general liability coverage, but carriers are only willing to offer $1 million,” says Chantel M. Roberts, a former claims adjuster who handled marijuana claims and fonder at CMR Consulting.
The departments of insurance (regulatory) have mandated insurers provide insurance if cannabis is legal in the state. But “the federal government, which controls banking, sees taking premium dollars as possible laundering of money-- so many insurers are still hesitant to enter into the marketplace,” Roberts says.
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The Takeaway on Cannabis Insurance Risk in 2024
Overall, the cannabis industry, while growing, faces significant operational and regulatory hurdles that directly affect insurance practices and availability.
“The development of more supportive legislation, like the New York medical cannabis bill, may encourage broader coverage and more insurers to enter the market, gradually normalizing business practices for cannabis companies,” Benka says.
Additionally, the introduction of legislation like the New York bill requiring medical cannabis to be covered by insurance plans is a significant step toward normalizing cannabis use in medical treatments and integrating it within the standard insurance frameworks.
“However, this also sets a new precedent that could complicate claims and underwriting processes due to the unique nature of cannabis-related liabilities,” Crist says. “As an insurance provider, we've had to recalibrate our offerings and reevaluate risk assessments to adapt to these emerging legislative changes, ensuring that both businesses and consumers are adequately protected under these new frameworks.”
Samuel Green, CEO at Blue Insurance, says, “Things are slowly improving. More carriers are getting involved. But there's a long way to go.”
