Misconceptions surrounding the cannabis industry continue to pose challenges for cannabis-related companies looking to implement effective risk management and insurance frameworks, as discussed in a session at the World Captive Forum last week.
In the session, “Cannabis captives: the misunderstood”, Jeff Conway, CEO of The Clipeum Group, explained that some auditors will flag brokers and underwriters that write cannabis business. Premiums coming through a bank from such business usually makes federal banks uncomfortable with the company as a whole, even if it is a state-regulated business where a broker sets the rates.
This leads to these companies moving from a federal bank to a state bank, which keeps risk-bearing capacity from the marketplace, Conway added.
Rocco Petrilli, chairman of the National Cannabis Risk Management Association (NCRMA), affirmed that because this external, non-operational risk affects capacity, this then makes it difficult to determine the risk management side of cannabis operations, as companies have to mitigate both the internal cannabis risk and the external litigation risk.
Although Petrilli emphasised that the main challenges in insuring cannabis lie in perception and reputation, as well as an outdated federal mandate and statute, Conway added there has been a change in the attitude of carriers.
He observed that four years ago, the response of carriers was a flat-out “no” when asked about cannabis risk. Now, there is more education, research and willingness — although those that are willing then find the marketplace has become significantly segmented.
With these difficulties in the marketplace, captives are well-positioned to be utilised to cover cannabis risk. Petrilli noted that captives provide advantages compared to other self-insurance structures as they offer availability, control, transparency and cost savings.
On the part of the NCRMA and Trichome, its captive-based model that administers risk protection and insurance products, these entities provide enforcement, control and risk management at the captive core.
In 2021, the cannabis industry reached an estimated US$250 million in premiums in the marketplace, according to Petrilli. He estimated that, if insured properly and with sufficient capacity, this figure could reach close to $1 billion.
Conway added that this provides a significant opportunity for the captive industry, beginning with considering the domiciles available to write cannabis-related business. He observed that consolidation is beginning as each state that legalises cannabis use (whether medicinal and/or recreational) must decide how they will come to market with their licences.
For example, Conway noted that states such as Nevada seek to control business to avoid oversaturating the marketplace, while other domiciles such as Oklahoma are much more lax.
The session concluded by discussing how the landscape of the cannabis industry will likely evolve throughout 2022, with Petrilli anticipating increased risk-bearing capacity through captives, as well as a greater need for custom coverages to meet state and municipal regulations, and a growing sustainability agenda.
