Cannabis is a growing billion-dollar industry but the insurance sector only offers a limited range of coverage (when they offer any at all). But what if cannabis companies could band together to create their own solution?
Insurance companies remain cautious when it comes to providing coverage for cannabis-related businesses. Some of the main concerns are:
- Prohibition: Cannabis is federally illegal and insurers worry about being caught up in any federal charges that might come down on an operator, even if their business is state compliant. That is a high risk that many firms do not want to take.
- No historical loss data: The cannabis industry is so new that the lack of data makes it difficult for insurers to understand the risk of what are insuring. Dispensaries have also been unfairly labeled as crime magnets, when in fact the opposite is true, due in part because of the high security measures they’re required to take. Speaking of high requirements…
- Tough regulations: States impose high standards for safety and compliance that cannabis businesses must meet or risk losing their license, making it riskier to insure them. There are common problems with cannabis security that can give an insurer peace of mind, but it may not lower your rate.
- Reputational risk: Many insurance companies consider there to be a reputational risk to working with the cannabis industry. The idea being that it’s risky because working with cannabis-related clients could impact their reputation (and the insurance company’s perceived risk load) and could lead to other clients and companies being less likely to do business with the firm.
- Profit: Scarcity drives up prices, and insurance companies can rake it in since cannabis as a crop has a low loss ratio compared to other crops. Since there is a lack of coverage options, the companies that do offer coverage to cannabis-related businesses and landlords are more likely to hike up the price. Even for those that receive coverage, will the carrier follow through or challenge any claims made? Courts could be more likely to favor the carrier.
With all of these concerns, it’s easy to see why carriers offer expensive rates for cannabis-related coverage (or none at all).
One potential solution is something called captive insurance, or closely-held captives (CICs). These are licensed insurance companies created by a business to primarily provide insurance coverage to affiliated businesses, a kind of formal self-insurance. That means a cannabis-related business could theoretically create a CIC, have it licensed by the state, and then sell insurance to other cannabis-related businesses.
All eyes are on the SAFE Banking Act that would create new opportunities for cannabis-related companies in regards to CICs, not to mention banks and financial institutions. CICs offer a way for cannabis-related companies to have more control over how their policies are crafted, enforced, and the types of coverage that are available.
But will CICs be necessary? It depends on how long prohibition lasts. As long as the federal government classifies cannabis as a Schedule I drug, insurance coverage from traditional carriers is likely to be slim and fraught with concerns.