Alexandra Gedge, Marsh Captive Solutions
Captives can offer flexibility in managing the emerging risks faced by cannabis companies, offering insurance where the market is limited or has excluded certain coverages, says Alexandra Gedge of Marsh Captive Solutions.
Cannabis is increasingly big business. According to cannabis researcher New Frontier Data, legal sales of cannabis could reach nearly $30 billion by 2025 in the US. The international market is predicted to reach $31.4 billion by 2021, according to Brightside Group.
This is already having an impact on the economy. Glassdoor reported a huge increase of 76 percent in jobs in the cannabis industry in 2019.
There are three types of cannabis use referred to here:
- Hemp and other versions such as cannabidiol (CBD) products.
- Medical marijuana.
- Recreational use of cannabis.
Countries are dealing with cannabis products differently. In 2018 Canada legalised majijuana use. Multiple US states have done the same, while in the UK cannabis has been legalised in some rare medical cases. This has created a large, and growing market that is now seeking appropriate insurance cover. The commercial market has not yet addressed all areas for this distinct industry.
The insurance problem
Given that cannabis is a controlled substance in many places around the world, some global insurers will not write cannabis insurance. Others, such as Lloyd’s of London, will write it only in limited capacity, having established that that providing insurance for cannabis in Canada does not breach the UK Proceeds of Crime Act.
“A particular benefit is in the traditional lines of coverage purchased by cannabis companies, such as directors and officers (D&O) insurance, where the commercial market is adapting.”
While Lloyd’s of London will write into Canada, at present it will not cover cannabis risks in the US. Despite being legal in some states, cannabis is still defined as a controlled substance by the US federal government.
There are insurers who will provide coverage in places where cannabis is legal. However, given that the cannabis industry is a new risk and emerging line of business, some key areas, such as recreational use, may be excluded. This is similar to other emerging lines of business where insurers do not want to take on too much risk, given the limited data available on the exposure and potential claims. Moreover, with the current transitioning insurance market, many lines of coverage have been firming and insurance is becoming more expensive.
The cannabis industry may struggle with the high premiums being offered by certain parts of the commercial insurance market. The business is dominated by startup companies, many of them having very limited data themselves. This is particularly the case where there can be many exclusions in areas of their work.
The captive solution
A captive could offer a viable solution to cannabis growers, distributors, and traders, in circumstances where insurance scope is limited or unavailable there are few insurers, or costs are prohibitive.
The captive can help resolve the key data issues by acting as an incubator and building up data over a few years. This will allow companies to demonstrate the risk profile of their business so that commercial insurers can feel more comfort in writing the risk.
It will also allow captives themselves to retain more risk. More captives are writing product liability and supply chain exposures, which is particularly evident as the captive owner is taking a part of the risk.
The captive can insure multiple lines and expand coverage that is purchased in the market. It can cover the cannabis companies’ traditional risks too, such as property, liability, and employee benefit exposures, which will become increasingly important as the sector becomes a larger employer.
A particular benefit is in the traditional lines of coverage purchased by cannabis companies, such as directors and officers (D&O) insurance, where the commercial market is adapting. The captive can write a part of this exposure in addition to other risks.
In such a fast-growing and highly regulated industry, there is a natural need for insurance. Captives have been utilised for new and emerging risks in the past and will continue to provide an alternative in this growing area.
Where allowed, Marsh Captive Solutions is prepared to set up captives for cannabis risks and we have strong relationships with domiciles such as the Cayman Islands and Bermuda, which already have experience in responding to cannabis exposures.
Alexandra Gedge is business development and captives executive vice president at Marsh Captive Solutions. She can be contacted at: firstname.lastname@example.org
Alexandra Gedge, Marsh Captive Solutions, Cannabis