The U.S. cannabis market is rapidly expanding with more states legalizing recreational use and an array of new products being produced every year. Rhode Island became the 19th state to legalize safely regulating recreational adult-use cannabis in May 2022. Several states such as Alabama, Arkansas, Florida and Pennsylvania have legalized cannabis for medical use only.
Cannabis has been legal in Canada since 2018 with additional classes becoming legalized a year later.
The significant increase in cannabis businesses of all types throughout North America have opened operators up to new risks and liabilities. Cannabis providers, growers and dispensaries hire such experts as industry consultants and security personnel with specialized skills and knowledge. Producers and growers invest in high-tech equipment and heavy machinery, which establish additional risks, especially when employees are operating this equipment.
With this investment comes innovation designed to expand product reach. One new trend in the U.S. is the opening of retail consumption lounges in such states as California and Nevada. These consumption lounges allow guests to consume cannabis products in a bar-like setting, which comes with a higher risk profile. There are countless other examples of the collective entrepreneurial focus the cannabis operators have, but many are first-time business owners who are still learning the intricacies of running a company.
Newer derivatives like Delta 8 THC and Delta 9 THC are regularly entering the market. THC is the marijuana plant’s primary component for causing psychoactive effects. Both offer benefits to some individuals, such as better sleep, controlling appetites and more.
Additional trends are highlighted throughout the remainder of this report.
Carriers and Capacity
Carriers have largely remained accommodating and accepting of the increased demand with sufficient capacity. U.S. sales of cannabis products is expected to double by 2030 to $72 billion according to cannabis industry research firm New Frontier Data. Carriers are aware of these trends so they recognize the value that exists in the cannabis industry.
Burns & Wilcox has access to admitted and non-admitted markets in states where available, although the majority of options are non-admitted. Burns & Wilcox works with accounts up to $100 million per policy with a $25 million per location max TIV and has strong industry connections to support affordable pricing and favorable terms and conditions where possible.
Carriers will avoid certain states and specific products. For example, Michigan uses a unique and complex framework of laws and a different set licensing requirements that some carriers choose not to service. They also offer limited coverage in specific areas such as in-transit or cargo.
Cyber, armed robbery issues are common in the Professional Liability space
The public-facing nature of the cannabis industry has made it a target for traditional and cybercrime efforts, which increases the risk associated with doing business in the field. There has been a significant rise in ransomware attacks not just for cannabis producers, but in the corporate and retail worlds as well. This increase in attacks are leading to higher claims which drive both demand and premiums (often 20 percent or more annually) higher.
For example, the average Cyber payout in the cannabis industry in 2020 according to Burns & Wilcox research was $120,000. That number rose to $550,000 in 2021 and is expected to be even higher this year. The average claims request in the Cannabis field in 2021 was $2.2 million.
Traditional crime such as armed robberies are also a significant factor within the cannabis industry, especially since it is heavily cash-based. There have been 85 armed robberies involving cannabis businesses in the state of Washington alone through the first six months of 2022 and most cannabis retailers and producers around the U.S. hire security personnel to combat this threat.
D&O polices are available in the Cannabis space with up to 10 carriers providing this type of coverage. Rates have decreased slightly as demand rises and insured parties can find favorable options attached to policies.
Submission quality is increasingly important
A theme we espouse in most lines of business is the need to submit fully completed, high-quality submissions for new or renewal coverage, and the same is true in the Cannabis sector. Although capacity is available, the fight over the best terms is competitive as new companies and individuals enter the market regularly.
In fact, the volume of submissions is so large that submission burnout is a real issue with underwriters, making it even more critical to have yours stand out from the crowd. Working with a specialist at Burns & Wilcox helps brokers and agents to know how best to present their client. We can help you ask the necessary questions to better understand if your clients are coverage conscious or are simply fulfilling a requirement. By understanding your client’s goals, Burns & Wilcox professionals can identify the data needed in a submission to secure competitive and appropriate coverage.
Suggestions to support a growing cannabis business
The legal cannabis industry is still young and many rules and regulations at state and local levels will continue being established, causing confusion for operators, producers and sellers. Turnover is common and expected.
Burns & Wilcox offers the following suggestions for brokers and agents expanding their book of business in this market to help their cannabis clients thrive:
Quarterly check-ins with clients are necessary. Astronomic growth also means significant turnover of existing businesses. A quarterly check-in with cannabis clients may help identify issues before they threaten the health of the business. These meetings can also uncover coverage gaps that could decimate a business if an expensive claim is required.
Manage client expectations. Find out what matters to your clients and pair that with the right carriers and policies to fit those needs. Many operators in the cannabis space are new to the entrepreneurial scene so walking them through the process supports client retention and satisfaction efforts.
Take advantage of increased carrier competition for business. Work with your industry contacts and ask for help from Burns & Wilcox’s experts to see if increased coverages and enhancements can help sweeten the policy mix.
“Clean” submissions provide extensive value. All submissions should include business plans, financials and extra details. With this information Burns & Wilcox can help you control the narrative for underwriters on behalf of your clients.
Do not let evolving laws and regulations in the cannabis field overwhelm you. Burns & Wilcox can help you resolve hard-to-place risks and even find subject matter experts to provide the information needed to make an informed decision. We take a risk adverse approach to building options while still having the ability to secure top-line coverage.
Relationships within the industry matter – so use all resources to build them. By effectively using your network contacts and ones Burns & Wilcox provides you will be in a better position for competitive quotes, favorable terms and conditions, a quick response and reliable risk assessment.
Burns & Wilcox offers in-house, often same-day binding market. We also work with sister company Stonemark to provide cannabis-related financing in the U.S. and Canada. This is valuable because regulated banking institutions are prohibited from closing deals in the sector.
Contributor(s): Jason Scheurle, National Product Leader, Cannabis, Burns & Wilcox; Emily McDaniel, Broker, Commercial Insurance, Burns & Wilcox; Leena Malik, Senior Underwriter, Commercial Insurance, Burns & Wilcox Canada; Cooper O’Connor, Senior Broker, Professional Liability, Burns & Wilcox Brokerage
This commentary is intended to provide a general overview of the issues contained herein and is not intended, nor should it be construed, to provide legal or regulatory advice or guidance. If you have questions or issues of a specific nature, you should consult with your own risk, legal, and compliance teams.