Cannabis-related businesses need good insurance policies to operate legally and to protect their assets, but providing that insurance remains challenging, preventing wide participation by carriers.
According to a new report from A.M. Best, the only global credit rating agency with a unique focus on the insurance industry, federal prohibition is at the crux of the problem, as cannabis is listed as a Schedule I controlled substance. While states have regulated the cannabis industry for medical or adult use, it’s still unclear what role the federal government plays since these new state-level rules contradict federal law.
“With such a controversial product, the potential for a broad array of liabilities for businesses operating in the field is high,” according to the A.M. Best report. “What’s more, the division between state and federal legality makes it difficult for businesses to find inclusive, affordable coverage, which, in turn, creates several concerns for the industry with regard to meeting its insurance needs.”
But just because it’s difficult to provide insurance policies for this industry doesn’t mean it isn’t needed. “Those directly and tangentially involved in the industry need insurance that addresses the specific needs of growers, retailers, distributors, property owners and lab researchers,” according to the A.M. Best report.
The 4 Segments of the Cannabis Insurance Market
The A.M. Best report breaks down the industry into four cannabis-related market segments that are in need of insurance market solutions.
- Cultivation: This category includes any business that handles cannabis along the supply chain, including indoor, outdoor, and mixed businesses that cultivate, process, harvest, test, package, and transport cannabis for sale and consumption.
- Dispensaries and Retailers: Retail outlets/stores where consumers can purchase medical or adult-use cannabis products.
- Infused Products: Considered an “extremely lucrative” segment in the report, this category has many opportunities for growth in the variety of products that can be infused, from chocolates to capsules.
- Landlords: This category broadly includes those who offer business-to-business services to other companies in the industry, from testing labs to packaging firms to commercial property owners. All the other ancillary businesses that work with cannabis-related businesses.
Opportunity, Despite the Risk
Even with the risks, however, about 25 carriers provide coverage to the cannabis industry as it currently stands, according to the report. Mostly non-admitted carriers are handling coverage in the U.S. and Canada, and they’re often partnering with other groups or agencies that have a more intimate knowledge of the way the cannabis industry operates and, therefore, where the coverage gaps exist.
Those carriers may provide coverage, but they’re being cautious, too, by offering basic policies with capped limits of $1 million per occurrence and $2 million aggregate, according to the report. With these relatively low caps, it’s likely that a claim will easily exceed those amounts, leaving the affected business with a big bill.
The cannabis industry remains an enticing and risky endeavor for insurance carriers, but with legal cannabis sales projected to be at $22 billion by 2022 in the U.S. (and illegal sales projected to lower), the opportunity is apparent.