Cannabis captives - hashing out the future
The cannabis, aka marijuana, market in the US is growing fast. Despite its still being illegal under federal law—possibly its biggest remaining challenge—as states have relaxed the rules on its use and consumption, the size of the market has increased rapidly.
Sales of legal cannabis were worth $9.7 billion in 2017, growing 33 percent from $7.3 billion in 2016, according to report from Arcview Market Research and BDS Analytics. The Mid-Year Update to the State of Legal Marijuana Markets 5th Edition projects that by 2021, the legal market will reach $24.5 billion.
Marijuana is currently legal for adult recreational use in nine states—Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, Vermont, and Washington—and Washington DC. Medical marijuana is now legal in 29 states.
The growing sector is also providing an array of opportunities and challenges for the insurance industry—and by extension the captives industry.
Is it legal or not?
Marijuana is listed as a Schedule 1 drug under the US federal Controlled Substances Act, which means it not legal for sale. Furthermore, any money that is generated from the sale of the substance may implicate federal anti-money laundering laws.
While a number of states have passed laws that permit the sale of cannabis (for medicinal or recreational purposes), this conflict has created uncertainty and hesitation within the insurance industry.
In the UK Lloyd’s of London pulled out of the cannabis insurance industry in 2015, stating it no longer wanted to write business in the US while the sale of marijuana remained illegal. Lloyd’s would, however, reconsider its position if and when the federal vs state conflict is resolved.
A bipartisan group of legislators has introduced a bill in Congress that would reconcile the conflict between federal and states laws governing cannabis.
The Strengthening the Tenth Amendment Through Entrusting States (STATES) Act of 2018—introduced by Senators Cory Gardner and Elizabeth Warren on June 7—would exempt individuals in compliance with state marijuana laws, and a set of new federal guidelines, from certain provisions of the federal Controlled Substances Act.
Joe Holahan, attorney at law firm Morris, Manning & Martin, believes that the bill has a reasonable chance of being enacted into law, and would “completely change the landscape for cannabis business”.
“If the bill passes, I would expect many more admitted carriers to begin writing cannabis risks, but the captives industry would also have an opportunity to help cannabis businesses develop self-insurance programmes and access reinsurance markets,” Holahan says.
Why a captive?
With the unique insurance needs of the cannabis industry, there are businesses in the US struggling to find suitable coverage, and consequently, a very enthusiastic captive insurance industry.
Amye King, national sales director of Emerald Risk Solutions, which assists legal cannabis-affiliated business owners in getting comprehensive cannabis coverage in a captive, says that a captive is an ideal business solution where commercial coverage is simply unavailable or is failing to cover all their risk.
“Cannabis-related businesses either can’t get commercial coverage or, if they can, we are seeing that it’s extremely expensive,” King says.
“Even with commercial coverage, there’s scepticism that claims will be paid since cannabis-related business—even within a legalised state for medical, recreational, or any purpose—is still a violation of federal law.”
Businesses that utilise a captive structure would have more control over claims, and could even potentially reduce some of their current commercial premiums while layering coverage with a captive solution in place, she adds.
Holahan suggests that cannabis businesses have all the same risks as any other business and need the same coverages.
“The needed coverages run the gamut: general liability, product liability and recall, property, crop, cargo, commercial auto, management liability, cyber risk, workers’ compensation—you name it,” he says.
King says that new risk and exposures are revealed to her daily.
“As cannabis businesses grow and offer new services to this industry, we are learning of the unique situations and risks that we are asked to cover,” she says.
“For example, how do you insure a driver who delivers medical marijuana? Like a pizza store, dispensaries have fleets of drivers who will bring your cannabis prescription to your door. These drivers obviously transport some cash as well as a product that may or may not be covered while in transit.”
The most progress
California has made significant strides towards meeting the insurance needs of legal cannabis-related businesses.
In the last year, the California Department of Insurance has approved Golden Bear, Continental Heritage, California Mutual Insurance Company, and the American Association of Insurance Services (AAIS), to write insurance products and programmes, according to Camille Dixon, director at the department.
“More insurance companies have filed products to be approved by the California Department of Insurance and we will make those announcements at a later date,” notes Dixon.
The offering of admitted products to the cannabis industry by insurance companies has been limited to California, although Dixon thinks this will change over time, as other states start to take notice.
“I would say the biggest challenge is the lack of data, which will be addressed through the passage of time. In terms of trends, we are seeing more insurers that are interested in offering insurance products to the cannabis industry—that’s a good thing,” she adds.
AAIS has filed a business owners’ programme, CannaBOP, a first-of-its-kind insurance policy tailored to the exposures of businesses in the cannabis industry.
Greg Fanoe, consulting actuary, Merlinos & Associates, suggests this may provide the admitted market with a standard set of rates, rules and forms for purchase—some much-needed standardised business practices.
“Similar progress is seen in other states, although across all states the majority of risks (to our knowledge) are still written on an excess and surplus lines basis,” says Fanoe.
“Different regulations by state make coverage/pricing comparisons by their nature inexact. As the market continues to grow countrywide, I expect more insurers to be getting into this space.”
King says she has been discussing cannabis captives with department of insurance leaders in a few states, and they have been receptive to a captive solution for their state-legal businesses.
“Most insurers understand how a captive can benefit cannabis or non-related cannabis businesses and they have been excited that a solution exists to help mitigate risks that the commercial insurers aren’t willing to work with just yet,” King explains.
The main barrier that keeps cannabis captives from taking off is that marijuana is still illegal under federal law.
“Federal law in this area is a concern and any captive solution should be developed in conjunction with a qualified attorney,” advises Fanoe.
Holahan says the risk of a captive being prosecuted at a federal level is hard to assess, but appears to be low at this juncture.
“The US Department of Justice recently stated it is focusing its enforcement efforts on other drugs, such as opioids and methamphetamine, which is as it should be,” he explains.
“That said, a captive writing cannabis risks needs to be certain to follow guidelines issued by the US Treasury Department’s Financial Crimes Enforcement Center.”
These guidelines require financial institutions, including insurers, to conduct due diligence on their customers involved in the cannabis business.
Holahan continues: “In the case of a group captive, this would involve taking steps to be certain insureds are properly licensed and have reasonable controls in place to ensure their businesses are operated in accordance with state law.
“In other words, a group captive needs to be certain its insureds are legitimate, state-legal cannabis businesses.”
Another challenge is that there continues to be limited claims experience and a relatively limited number of lawsuits related to liability claims or challenging policy forms and coverage terms, explains Fanoe.
“This uncertainty is a large part of why many insurers are wary of entering this space or are entering this space only with major exclusions. As time goes on and the legal issues become resolved, as well as rating plans and forms becoming more standardised, this issue should largely be fixed,” he says.
Dixon adds: “While federal illegality poses some unique challenges, the risks and exposures are pretty much the same as you would see in any other business. The coverages needed for the cannabis industry are the same as any other business.
“There are some federal protections in place (the Rohrabacher-Blumenauer amendment, which expires on September 30, 2018 [medical only], and the FinCEN guidance [medical only]). There are also a few bills in Congress that would address the federal issues if they pass through both houses and are signed by the President.”
King says the challenges in this space are abundant, and that Emerald Risk Solutions’ main mission is to help educated cannabis-related businesses on the captive solutions available, and how they can potentially work in conjunction with commercial coverage to remove as much risk as possible.
“This is a sophisticated movement of bringing one of the oldest plants known to humans back into full production to help with both medicinal and industrial uses,” says King.
“The trend is that more Americans are coming out of the ‘cannabis closet’ and into full disclosure that they understand this plant has amazing benefits and uses (on the hemp side).
“Tobacco farmers in America, who grew a crop that now isn’t as desired are switching to growing hemp (the ‘twin sister’ of marijuana, both are derived from Cannabis sativa) and the laws around hemp are hopefully changing this year to remove it from the list of illegal drugs (it doesn’t contain the psychoactive qualities of marijuana, but looks similar).”