Why Insurers Aren’t Yet High on Cannabis
States are increasingly allowing cannabis use, but getting insurance coverage is proving tough for the industry.
WHY YOU SHOULD CARE
Insurers still see cannabis as risky.
Major insurance providers, including Berkshire Hathaway and Aon, have begun to offer coverage to American companies in the legal marijuana industry, which had long been off-limits due to regulatory or reputational reasons.
However, investors and executives say many insurers remain cautious in their approach, resulting in higher prices. They argue that more widely available coverage is badly needed.
“One of the most miserable things I have to deal with for my job is getting insurance,” says Tim Conder, chief operating officer of publicly traded Tilt Holdings, a Massachusetts-based group that owns a variety of cannabis-related companies and reported $46 million in revenues in the third quarter.
Marijuana is legal for recreational use in Canada and 10 American states and is either decriminalized or approved for medical use in many others. Every part of the business — cultivation, lab testing, distribution and retail sales — requires insurance coverage, from general liability to property and workers’ compensation.
If your business plan includes the word ‘cannabis,’ expect to pay more.
Kyle Nichols, president, Hugh Wood Canada
Reliable numbers on the size of the industry are hard to come by, but legal spending on cannabis in the United States was just under $10 billion last year, while cannabis companies attracted $14 billion in funding, according to BDS Analytics, an industry consulting firm.
Neil Hitchcock, CEO of Bermuda-based insurance broker Skyfront, estimates that the legal U.S. cannabis industry would pay about $1 billion in annual premiums were it insured to levels normal for other businesses. The demand means that Skyfront is “incredibly busy,” but “the problem is the limited capacity to take risk” on cannabis businesses in the insurance market, Hitchcock says.
He pointed to Lloyd’s of London, where members of the market are not permitted to write cannabis insurance in countries where the plant is not legal at a federal level — which rules out working with clients in the U.S. The insurance marketplace said last year that it would begin providing coverage to Canadian companies.
Five years ago, insurance was hardly available to the U.S. industry. Things are getting better, stresses Conder. Today, Tilt’s operating companies use insurance from both large providers such as Aon and small specialists such as Cannasure.
But others point to higher prices as a result of the restricted insurance supply. “If your business plan includes the word ‘cannabis,’ expect to pay more,” says Kyle Nichols, president of insurance broker Hugh Wood Canada. He adds that even in a country where cannabis is legal, companies in the industry can pay five to 10 times standard rates.
Kyle Kazan, founder of California Cannabis Enterprises, one of the largest cannabis companies in the U.S., also has extensive holdings in real estate and says his cultivation facilities in California pay double the insurance premiums required for his pecan farms in Georgia.
Kazan says it’s a challenge to find insurers who understand the industry. “You don’t want your local State Farm agent doing this,” he says. He uses insurers including Berkshire and Kinsale for property and workers’ compensation coverage.
Kazan says obtaining directors and officers (D&O) coverage, which provides liability cover for senior staff and executives, and auto insurance for his distribution operations was particularly challenging.
Erich Bublitz, who oversees cannabis underwriting at Admiral Insurance, a subsidiary of W.R. Berkley, says his company avoids writing D&O coverage for cannabis groups because of their complex and sometimes opaque ownership structures, as well as the tangle of state and federal regulations.
“We don’t think there are enough controls in place for us to feel comfortable [writing D&O policies],” Bublitz explains. On auto insurance, he says, “workers in the industry tend to be users of the product — I’m not saying everyone who is driving is high … but auto is hard anyway and you add in that factor and it becomes too hard.”
However, Bublitz does not think the rates charged to insurance companies are significantly higher than in other industries and he believes there is increasing competition for business. “But there are additional exposures [in cannabis],” he argues, noting that people rarely break into buildings to steal soybeans.
Berkshire Hathaway and Aon did not respond to requests for comment.
Another risk that insurers mention is the prevalence of cash-based transactions when people buy cannabis products, resulting in significant sums having to be carried by delivery people or held at retail outlets.
Cynthia Cleveland, president of California cannabis company Vertical Brands, points out that this risk would decline with the passage of the SAFE (Secure and Fair Enforcement) Banking Act, a bill currently in Congress. If passed, the SAFE Act would make it explicit that federally regulated banks are permitted to work with cannabis companies in states where marijuana is legal.
“Our business welcomes regulation,” says Cleveland.
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