The times certainly are a-changin’. As of this publication, thirty states have legalized cannabis use in some form, with eight approving marijuana outright for recreation. As new avenues open up for production and distribution of plants, oils, edibles and the wide variety of other cannabis-related consumer products and medicines, new insurance product development opportunities emerge for companies to provide coverage for every corner of this fledgling market.
As cannabis widens in legal acceptance, the insurance industry is realizing that the market demand for coverage will continue to grow (no pun intended). Before wide-spread legalization, cannabis coverage was part of the non-admitted market; however, as legalization spreads, more and more regulators want companies to write coverage on an admitted basis, which will increase regulation.
The road to cannabis-related insurance product development is still under construction. There are bumps and unforeseen detours along the way. Here are four hurdles to prepare for as you gear up to offer coverage for cannabis products.
Hurdle #1: State vs. federal laws
No matter what is happening on a state level, the bottom line is: according to the federal government, marijuana is still a schedule I controlled substance. It occupies the same classification as heroin, LSD, and peyote. This throws a measure of uncertainty into the entire line of coverage. What if the Feds start cracking down on cannabis companies? If your company pays a claim, could your organization be held liable for participating in what the federal government considers to be a black market? Meanwhile, on a more niche level, certain insurance coverages are regulated under federal standards, such as terrorism and most types of flood insurance. Would your clients be eligible to purchase TRIA or flood insurance? As of now, the answers are unclear.
Just because an insurance product is approved at the state level doesn’t mean you’re fully in the clear to proceed. When the state governing body approves the legality of a product, from an insurance standpoint, the product is fine. However, it’s up to the judicial branch to interpret the contracts. The courts will determine the mechanics of coverage, and those outcomes are still being decided.
Hurdle #2: A long learning curve
Cannabis coverage is uncharted territory, with a lengthy education process for everyone involved. Agents need to be informed as to how the product works, what it covers, what it doesn’t, etc. This information must be sorted out, then communicated to policyholders. Regulators, claims handlers, underwriters—everyone along the entire insurance pipeline is tasked with learning about the new norms and standards for this unconventional product. There are still many ambiguities that require clarification and dissemination among insurance professionals.
Hurdle #3: Product development and pricing challenges
Cannabis insurance product development and pricing are wide open at this point since there is no specific historical information to reference regarding the frequency and severity of claims. It’s also difficult to ascertain an accurate exposure base. Yes, borrowing from other industries that are similar in scope and nature such as tobacco, agriculture and liquor liability can provide the broad strokes. However, when you’re developing a form or trying to determine rates, there’s no specific past data from which to draw. Rate and form development in the cannabis business require a “use your best guess for now” approach.
Hurdle #4: Clarifying what/whom you want to cover
The cannabis industry has three main categories that will require coverage: producers (growers), processors, and distributors. Depending on who you’re insuring, coverage offerings could differ greatly.
Growers and processors require a product liability-type coverage. They will be most concerned with coverage related to product contamination, accidental or deliberate tampering, or recalls. They’ll also need coverage for equipment, general liability, building structure coverage, non-employee slip-and-falls—standard manufacturing-type policies that have nothing to do with cannabis itself.
On the other hand, distributors will need coverage that relates mostly to their place of business, not unlike the types of coverage that apply to a bar or liquor store. As the public consumes the product on their premises, distributors will want to protect themselves against liability from over-serving, fights between customers, product spoilage, etc.
Where do you go from here?
Now that you’re aware of the hurdles, the smartest step is to start drafting a plan. Consider getting approval for products related to one aspect of the industry (production, processing or distribution), then expanding from there. Like all aspects of insurance, regulatory requirements differ by state. Add to that the push-and-pull between state and federal legality, and suddenly the variables multiply exponentially. As mentioned above, there is not a lot of precedent here to draw from, so it’s important to time and proceed carefully. If your company is not set up internally to handle the mountain of research required, work with a proven insurance services provider who already possesses experience drafting policies. Their deliberate methodology and expertise can save you from a significant drain on time and resources.
Cannabis insurance is still uncharted territory with a lot of work to be done. However, if you take your time and proceed carefully, you’ll be in the best position to break in early to this “budding” market opportunity.