Cannabis businesses have much to look forward to in 2021, with a Democratic-led Congress and a more cannabis-friendly Biden administration bringing new optimism to meaningful reform this year. Americans are more likely now than at any point in the past five decades to support the legalization of marijuana in the U.S., with 68% support among adults, according to Gallup.
But, from a risk management standpoint, the cannabis industry is in for a bumpy ride in a hardening insurance market with limited capacity, as carriers brace for more claims and wait for the industry to further stabilize as the federal position on cannabis changes.
In 2020, we witnessed most states deem cannabis-related businesses “essential services” during the COVID-19 lockdowns, significant sales growth across state markets, and a green sweep in the November 2020 elections, with Arizona, Montana, New Jersey, and South Dakota residents voting to legalize adult use marijuana, and South Dakota and Mississippi voters approving medical marijuana programs.
Despite the pandemic in 2020, retail sales of medical and adult use cannabis grew 33% topping $16 billion according to BDSA, and the market is expected to rise up to $37 billion by 2024, according to Marijuana Business Daily. The cannabis industry will continue its significant growth trajectory as markets mature and new ones come online in Arizona and other states.
Lawmakers in several states, including both the governors of New York and Connecticut, have recently renewed efforts to legalize adult use cannabis during the 2021 legislative session, as the New Jersey ballot victory is likely to usher in an “escalating snowball effect” of new markets in the northeast and mid-Atlantic states.
The Biden administration and a Democratic-controlled Senate will prove more amenable to cannabis legislation at the federal level, although reforms in 2021 will unfortunately fall short of full decriminalization and descheduling, with competing national legislative priorities and a 50-50 split in the Senate (with Vice President-elect Kamala Harris as tiebreaker) likely hindering more sweeping changes this year.
Here are four insurance- and risk management-related trends in the cannabis industry in 2021:
1. Federal law continues to limit new carrier participation—but expanded coverage options are emerging.
Federal prohibition continues to drive hesitancy to broader carrier participation in the cannabis insurance market.
Even in a Democratic-controlled Senate, passage of the Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act (removing cannabis from the list of scheduled substances and eliminating criminal penalties for distribution, manufacturing, and possession) is not likely in the Senate this year given the need to secure 60 votes to pass such legislation.
The MORE Act passed the U.S. House of Representatives in December 2020, but the Senate’s filibuster rule requires 60 votes to end debate on most items, allowing the minority party to forestall the majority’s efforts to pass the MORE Act (or other significant cannabis reform) in the Senate this year.
We are more likely to see incremental reforms at the national level, such as the SAFE Banking Act (creating protections to enable banks and credit unions to serve the cannabis industry), viewed by analysts as the most likely to pass the Democratic-run Senate in 2021.
As a result, the cannabis industry will continue to face similar difficulties obtaining access to a broad range of traditional banking, lending, and other financial services—including the ongoing limited insurance carrier appetite for cannabis-related risks. In turn, significant expansion of standard market carrier participation in the cannabis market is unlikely in 2021.
Existing cannabis insurance carriers are similarly unlikely to offer substantial additional capacity and broader coverage terms—and may seek to further tighten exclusions—as they court reinsurance partners and continue to monitor emerging risks and the federal position on marijuana laws.
However, there are signs of increasing market participation and expansion of cannabis insurance options.
For example, in early 2021, the National Cannabis Risk Management Association (NCRMA) will make available to NCRMA members its first captive insurance program, Trichome™ Risk Protection Products, available exclusively through appointed brokers. Trichome™ will initially provide property, premises liability, and products liability coverages to standalone NCRMA member dispensaries and dispensaries with an associated grow.
Appointed brokers, such as Purple Risk Insurance Services, who have been vetted and approved by the NCRMA to exclusively place the new Trichome™ cannabis insurance products, will work directly with the program’s managing general agents to service NCRMA members. The NCRMA provides a growing industry membership with risk management, education, and insurance solutions through top service partners and offerings.
We will continue to see incremental cannabis insurance enhancements from other carriers and program managers in 2021, but likely fall short of significant participation, greater capacity, and broader coverages from new markets.
2. Ongoing property capacity limitations.
Among the more challenging problems with insuring the cannabis space—where issues include rising premium rates, the impact of the pandemic, crime, theft, and product liability concerns, among others—is capacity, since most carriers have been avoiding cannabis risks due to federal illegality.
With higher sales revenues and larger values in general across the cannabis industry, it is increasingly difficult for larger operators to obtain limits to satisfy their commercial insurance needs. And insiders predict we are not going to see a significant increase in capacity in the next twelve months.
Property capacity across the broader insurance market has become more challenging, and we have seen carriers seek 15% to 20% rate increases in the cannabis space on no loss account renewals in the Surplus Lines insurance market.
In a choppy 2021 insurance market, it is important to review your coverage options on renewals, as markets and appetite can vary significantly in the constantly evolving cannabis insurance landscape.
3. Product Liability risk—and premium—increases.
In 2020, the cannabis industry witnessed further product liability claims and litigation related to vaping, product contamination, and THC and CBD labelling and compliance issues, to name a few.
Cannabis insurance carriers continue to monitor the industry’s response to these issues and will be more rigorous about underwriting product related exposures. The industry can expect ongoing product liability premium increases as a result.
For cannabis businesses, exercising more care and supervision in all aspects of operations, including compliance with applicable regulations and the selection of partners and vendors, is critical moving forward.
Avoid less expensive products liability insurance options carrying a full “cannabis health hazard” exclusion or other significant limitations that eliminate meaningful coverage for bodily injury claims.
And, using alternative risk transfer tools such as requesting an additional insured endorsement from your partners is similarly critical for any operators in the cannabis supply chain.
4. Growing importance of Directors & Officers liability and Employment Practices Liability insurance.
With the likelihood of federal cannabis reform in 2021 and surging state market growth, the cannabis industry is expected to see its best year for new capital investment since 2017, according to New Frontier Data.
A new class of investors and fresh capital could supercharge deal-making in the cannabis industry ahead of anticipated changes at the national level.
In a constantly evolving and tumultuous market, owners, board members and executive officers of both private and public cannabis companies should consider – and many are required to obtain – directors and officers (D&O) liability insurance to protect against an increasing number of financial risks.
D&O liability insurance protects directors and officers from claims made against them while serving on a board or as an officer of a company. Without D&O insurance, board members, officers and individual investors could expose their personal finances.
Acquiring D&O insurance coverage, although costly, is increasingly a necessity for cannabis industry executives as the industry matures, deal-making surges in 2021, and federal legalization approaches. Learn more: Directors and officers liability insurance is increasingly important – and costly – for cannabis companies.
Moreover, cannabis industry employment grew about 50% during 2020, up to 300,000 full time employees working in the industry, with equivalent job numbers as the beverage industry and computer programmers, according to Marijuana Business Daily.
The employment trajectory in the industry for 2021 is strong, with numbers reaching as high as 575,000 full-time jobs by 2024.
Those businesses that fail to institute proper hiring processes, including background checks, as well as procedures for adequate security and theft prevention among other things, will face challenges.
As cannabis companies experience growth in number of employees, adding an Employment Practices Liability insurance policy is prudent to protect both executives and the company in general from employment-related lawsuits.
Purple Risk specializes in the cannabis insurance market and understands the challenges facing your business. We can help you properly safeguard your business with top-tier cannabis insurance solutions. Contact us to learn more: https://purplerisk.com/contact-us.
David M. Kennedy, Esq. is the founder and CEO of Purple Risk Insurance Services, an NCRMA appointed broker. For inquiries about cannabis insurance, contact David at [email protected] or visit https://purplerisk.com