cannabis insurance

Six Impacts of COVID-19 on the Cannabis Insurance Market

by Kyle Hales

When the current Coronavirus pandemic finally ends, we’ll have seen that no industry was left unimpacted by its path of disruption and change. This includes the ever-expanding legal cannabis insurance industry in the United States. Below are what I believe to be six impacts of COVID-19 on the cannabis insurance market.

1. Insurers who currently have programs on file are well-positioned to see continued growth in this marketplace.

The good news for the cannabis industry is that it has been deemed an essential service by numerous states; similar to grocery stores, pet stores, and beverage centers, among other businesses. As such, the cannabis industry can continue to grow, sell, and distribute their product in a similar manner as before. And analogous to the large increases beer, wine, and alcohol sales, I would anticipate that the cannabis market will continue to see booming demand during the pandemic.

2. Smaller cannabis manufacturers, processers, and distributors will be negatively impacted.

The recent trend of capital markets drying up for the cannabis industry will only be exacerbated by COVID-19. Additionally, coronavirus assistance through the CARES Act and other federal programs is unavailable to the cannabis industry. This will put further pressure on businesses that were not immediately profitable. With unemployment recipients receiving an additional $600 in unemployment benefits through the CARES Act, many of these smaller businesses will find it difficult to hire new employees. They may need to offer higher wages to entice furloughed individuals to reenter the workforce, further putting a squeeze on smaller businesses. It’s likely that larger companies will buy out some of these smaller entities, forcing consolidation of the industry. Cannabis insurers will need to be cognizant of the market forces impacting certain areas of the cannabis industry.

3. Current insurance carriers will likely more closely focus on the business they have already written, while their expansion plans are put on hold.

The efforts for the cannabis marketplace to continue to expand its presence has been put on hold. In New York, for example, last month Governor Cuomo conceded that it’s, “unlikely marijuana will be legalized in the state this year,” essentially delaying its legalization until 2021, at the earliest. With state governors dealing with more complicated issues, such as when to reduce/eliminate the quarantine restrictions, I don’t anticipate the legalization of cannabis to grab the attention of many state legislatures.

4. It’s likely that the approval of new insurance products offering cannabis coverage will be delayed, while excess and surplus lines carriers continue to enter the market in an effort to scoop up any excess demand for coverage. 

In March, the state of Pennsylvania requested that insurance carriers not submit any “non-essential” filings in their jurisdiction. With the possibility of other states potentially implementing similar restrictions on filings, it is possible that any new program or rate change filings would get further delayed or rejected by the states. This likely means that insurers will have short-term pricing power to increase premiums through flexibility in their rating plans. They will also be able to more closely underwrite their insureds without fear of losing business to the competition.

5. More carriers will strongly consider reducing their product liability exposures for cannabis products

This has been evidenced in the vape pen manufacturers, especially those manufacturers who were sourcing products overseas. The COVID epidemic has begun to expose how underlying health issues are adversely impacting the death rate. It wouldn’t be a stretch to me if insurance carriers draft further exclusions, especially those that specialize in smokable cannabis products. It’s likely that COVID-19 is addressed, by name, similar to asbestos.

6. Reinsurance will be more difficult to find. 

Fear of the unknown has always been a hindrance to the availability of reinsurance markets and the cannabis insurance industry is in the unenviable position of being a relatively new marketplace for reinsurers. The added stress and uncertainty of the future due to COVID-19 will only exacerbate the already tight market conditions for cannabis reinsurance. Hopefully, this will be at least somewhat offset by the natural aging process that an industry goes through, as reinsurers become more familiar with the risks and exposures they underwrite.
When this pandemic finally ends and life returns to “normal” or “new normal”, we should expect to see the cannabis market continue to grow, but with fewer and mostly larger entities. Insurers who understand this marketplace and can quickly adapt to these changes will be able to rapidly respond to its inevitable expanding insurance needs.

Questions about how the insurance industry is being impacted by recent events? Contact us today.

4 Hurdles to Overcome When Considering a Cannabis Product Offering

by Kyle Hales

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.

At Perr&Knight, our insurance product development experts have already received approvals in a number of states for cannabis-related insurance product. If you are thinking of expanding into cannabis coverage, contact us today to discuss your strategy.