In 2017, cannabis-related cultivation and retail investments reached $718 million1. In addition, the legal cannabis industry is projected to exceed $50 billion by 2022.
It may seem like cannabis is the next California Gold Rush, but while there is great opportunity, there is also great risk. On top of complex and evolving local, state and federal laws regulating the product, the needs and risks vary by client and need to be thoroughly examined.
A small-scale grow operation that has been operating in the black market for years before complying with new regulations will have much different needs and expectations than a sophisticated investor dedicating a large amount of capital to launch a cannabis brand. Investors with deep pockets generally require top-of-the-line insurance, while smaller start-ups are typically more willing to take on risk themselves to save on insurance premiums.
Despite the relative youth of Cannabis Insurance, the market is highly competitive. While there is a limited carrier selection, largely due to the fear that the federal government may crack down on cannabis businesses or even carriers themselves, an abundance of brokers and agents are fighting to place the coverage.
Opportunity is abundant but no client is alike
There is opportunity for brokers and agents to capitalize on the cannabis insurance industry, particularly among retail clients. Yet, while cannabis businesses need traditional insurance policies such as Property or Product Liability, there is no cookie-cutter policy in terms of the insurance needs a cannabis business may have.
“There is a lot of interest in cannabis risks from retailers exploring the space,” said Jason Sawin, E&S Property Broker, Burns & Wilcox Brokerage. “Interestingly, many of the larger clients are being managed by consultants and attorneys. They, and their investors, are concerned about being adequately protected.”
Although cannabis businesses have many traditional exposures such as Fire or Product Liability, each client may present unique situations and widely variable risk tolerance. For example, many states and municipalities require a proposed cannabis business to carry insurance as a prerequisite to apply for a license. A policy that provides excellent coverage for an operating dispensary may provide little or no coverage for a vacant building under renovations, which is intended to be operated as a dispensary in the future.
“An important lesson for those interested in the cannabis industry is to understand that you cannot write one business one way and expect the same approach to work three months down the road,” said Sawin. “On top of the constant legal challenges, the needs and risks of each client are going to vary tremendously and need to be taken into consideration.”
“Communication and understanding a client’s individual needs is essential in this industry,” said Sawin. “If a client simply wants the ‘bare bones’ policy to earn a certificate, then there is a need to educate them. Once they have assets and a brand to protect, a more complex insurance program is going to become critical.”
Ancillary insurance as an avenue into the industry
One key to success when entering the cannabis space in 2018 is to acknowledge that the ‘first-mover advantage’ is not applicable anymore.
If a broker or agent is interested in working in the cannabis space, underwriting ancillary cannabis businesses can be an excellent entry point. Ancillary businesses include lawyers and other professionals that provide services to marijuana businesses, security firms, and manufacturers that provide essential supplies such as lighting systems or fertilizer.
“Developing expertise writing ancillary businesses should not be overlooked as a way to break into the crowded market,” said John Deneen, Commercial Underwriter, Burns & Wilcox. “For example, an agent can get a foothold by first writing security companies that cater to the cannabis industry, and then use those clients as a referral base to launch into plant-touching businesses.”
Added value: risk mitigation and loss control
Applications should be carefully completed with clients and all operations must be disclosed, whether or not the application specifically addresses those exposures. One significant but frequently overlooked exposure for cannabis clients is vaporizer pens, which are essentially e-cigarettes intended to consume cannabis oil. Vaporizers are among the fastest-growing cannabis products, but they have a risk of catching fire similar to other consumer products that utilize lithium batteries.
Many product liability policies exclude vaporizing devices, while others are silent about vaporizers but exclude all imported products. The vast majority of vaporizer pens are manufactured in Asia, so a client may be completely bare of coverage unless they purchase the devices from a US-based distributor or manufacturer who carries Product Liability and names them as Additional Insured. A supplemental policy can be offered to fill the gap, and clients should sign off to acknowledge if they are receiving no coverage for one of their products.
It is critical to add value by educating clients about the options available, such as non-insurance risk management tools. Working with a loss control partner like Afirm, a premier provider of premium audits, inspections and risk solutions, brokers and agents have a trusted advisor to insurance carriers. As more states approve recreational marijuana, auditors have had to work closely with brokers and agents on how to specifically classify a variety of operations. Specialists at Afirm have performed extensive research on this subject to recommend the best path forward.
“The insured will often approach multiple brokers and agents without recognizing that they are all going to the same two or three markets, so you’ll have to go above and beyond simply presenting a quote to make the sale,” said Deneen.
Creating a positive experience for the insured is significant on every angle, from acquiring coverage to completing premium audits in a timely manner. Knowing the expectations, brokers can assist their clients in being better prepared and present themselves as a stronger partner.
No matter the case, it is important to remember that no two clients are alike, having ancillary business is a good point-of-entry, and lastly, while the rewards for your clients are great, so is the risk.