(S)toked on Compliance: The Current State of Cannabis Insurance
October 12, 2021
No industry is familiar with our country’s state-based regulatory system quite like insurance. Other than the cannabis industry, that is.
Even though 36 U.S. states and the District of Columbia legalized cannabis for medical or recreational use, it’s still illegal at the federal level. That means, in some states, cannabis is criminalized alongside drugs like heroin, methamphetamine, and LSD. And in others (ahem, Colorado), cannabis is projected to hit $41 billion in legal sales by 2026 – nice.
What’s the issue?
Since, federally, cannabis is classified as a Schedule 1 substance, it’s illegal to manufacture, distribute, or sell cannabis in the United States, even if it’s legal at the state level.
We know what you’re thinking: That sounds awfully pedantic. But the reality is, this disconnect has very real consequences for both companies and individuals who work in the cannabis industry.
People might not want to work at a company that’s considered illegal. Will they get arrested? Will future employers take them seriously? Will they have a hard time accessing federal services that require proof of valid employment? This can make it tough for cannabis-based companies to find quality employees.
And finding great employees is just one of the many hoops cannabis companies need to jump through. Some banks won’t let cannabis companies open accounts or receive loans, some companies don’t let their employees invest in the cannabis industry, and many cannabis companies struggle to obtain insurance.
What’s up with cannabis insurance?
All businesses face risks. Whether through injured employees, the loss of crops, property protection, or financial liabilities, without insurance, the cost of doing business can be prohibitively high. For the roughly 70 percent of cannabis companies forced to operate exclusively in cash, those risks increase through targeted criminal activity, including robbery and theft.
And yet, cannabis insurance is hard to come by. The insurers who do provide cannabis insurance policies often pair the product with extremely high premiums. There are a few reasons for this:
- An unknown consumer
Insurers rely on financial history to assess the risk of insuring someone – or something. Since cannabis companies often operate in cash and struggle to open a bank account due to its federal illegality, they lack documented financial history. Many insurers don’t see the upside to getting involved with companies that present an unknown amount of risk. And the irony is that without insurance, the amount of risk a cannabis company takes on increases.
- An unknown product
Cannabis insurance is a relatively new product, which means there isn’t sufficient loss history to appropriately price policies with standard actuarial methods. As the industry grows, more data will become available, helping to solve the issue of product availability and pricing. But it’s something of a catch-22: The industry needs insurance to grow, and until the industry grows, insurance is widely unavailable. And around and around we go.
Navigating this cannabis insurance quagmire
“This isn’t an industry that’s been around for a hundred years where carriers can plug in data to have a clear sense of when and what losses might look like,” says Stephanie Bozzuto, co-founder and president of marketing at Cannabis Connect Insurance Services, an independent insurance firm that connects cannabis companies with custom-built insurance programs.
“We’re just now starting to get claims,” explains Bozzuto. “For years, employees worked in an illicit market, and it took a while for them to understand that this is a legitimate business now. But we’re finally starting to see claims – workers compensation claims, director and officer claims, employment liability claims, tons of commercial auto claims – and that will help to produce the data that people need to properly rate.”
For the insurers who jumped into the cannabis insurance market in spite of these blind spots, many are program managers who specialize in niche risks, build a unique program around that risk, and understand they’re taking a chance on an untested product.
“The risk for them,” says Bozzuto, “is, will this be profitable or will it put them out of business? For most of them, it’s profitable.”
The times they are a-changin’
As cannabis continues to legalize across states, for both medical and recreational purposes, more and more carriers begin to consider cannabis insurance as a viable product. And the federal legalization of cannabis will only drive this trend forward.
“There’s a lot of premium on the table here, and the industry is growing rapidly,” says Bozzuto. “When cannabis becomes federally legal, more insurance carriers are going to get into this space and participate in this green rush, but the carriers that get involved in this space earlier, rather than later, are the ones who will have the data and experience to design policies.”
The cannabis insurance market is constantly changing, and the federal legalization of cannabis is truly a question of not “if” but “when.” With the House Judiciary Committee slated to vote on a bill to federally legalize marijuana, that “when” seems to be fast approaching.