Five reasons missing the cannabis insurance train will kill captive managers

How would you like a multibillion-dollar industry with a specialty risk and no commercial coverage as a lead for a captive? Every captive manager’s dream is to find green pastures with challenging risks and a dearth of commercial options.

This is the promised land of captive insurance—and it is the reality of the cannabis economy. Those few captive managers already in the market are making waves in one of the fastest-growing, most dynamic sectors of the North American economy. The cannabis wave has spread through Canada and the majority of the US. The real question is whether captive managers can survive without a cannabis practice.

Let’s get the big issue out of the way: working with cannabis companies means that the Department of Justice may be able to prosecute the manager and its leadership for aiding and abetting the commission of a felony. There is no way around this conclusion as cannabis remains a Schedule I substance under the Controlled Substances Act. Any captive manager operating in the ‘green’ economy should be ready to weather this storm.

Of course, fighting the government should be nothing new to quality captive managers. The Internal Revenue Service has been fighting against captive insurance structures for decades. Being an outlaw is part and parcel of captive insurance.

That being said, captive managers shouldn’t call themselves cowboys just for showing up. The Department of Justice is unlikely to begin enforcing laws against cannabis companies, their accountants, lawyers, or insurance carriers any time soon. William Barr, the newest nominee for Attorney General, conceded that  he would not interfere with states’ cannabis laws. This position mirrors the former Attorney General’s position on the matter.

For all practical purposes, the federal government has conceded defeat in the so-called war on drugs. The question remains how long this legal grey area will linger until Congress finally reschedules cannabis.

Nobody knows how long cannabis will remain illegal at the federal level. Fortunately, this is not the only commodity in the green economy. The federal government’s 2018 Farm Bill legalised industrial hemp. Hemp is a versatile plant with products ranging from rope and paper to cannabidiol (CBD) oil. CBD oil is a non-psychoactive substance derived from either cannabis plants or hemp. As long as the CBD oil’s tetrahydrocannabinol (THC, the chemical causing intoxication) level remains below 0.3 percent, CBD oil is legal.

CBD oil has been hailed as a wonder drug with uses ranging from topical creams that alleviate arthritis to antiseizure medical products that can be administered orally. The applications of CBD are not yet fully understood.

The cannabis industry is expected to generate over $20 billion in US sales in 2021. The hemp industry will add to that number. Currently, only a handful of managing general agents are operating in this space with one admitted carrier, Golden Bear, writing premium in California. California is actively promoting more carriers to enter the market, but banking issues with cannabis make it difficult to attract quality carriers. That said, there are a number of E&S providers with meaningful solutions. The problem is that E&S coverage is limited and generally more expensive than insureds would prefer.

All of this adds up to a tremendous opportunity for cannabis captive insurance. Whether approaching through the hemp industry or directly through the cannabis market, there is a need for specialty insurance. The volume of growth in the cannabis economy means that insurance needs will rapidly change and admitted carriers hamstrung with state filings will not be able to keep up with the industry’s needs. Missing out on this industry means missing out on the single fastest-growing area of the economy for the next decade.

Five steps to success

What are the best ways to ensure success? First, understand the risks. The risks of mould for West Coast cannabis indoor growth facilities are radically different from those for East Coast hemp farms. Also, the quality of farming is largely dependent upon the experience of the farmer. Former tobacco farmers transitioning into hemp are going to incur fewer losses, and should command a lower premium, than novice farmers interested in the cannabis revolution.

Second, be professional. The days of your marijuana-smoking friends making it big in cannabis are long since over. The industry is flooded with agricultural specialists who understand commercial farming, process controls, and risk management.

Third, show up. There are not that many captive managers who speak fluently about risks in the cannabis economy. The banking issues remain a tremendous problem for managers looking to create cannabis captives, but those issues are slowly falling away. Even national banks are beginning to openly defy the government and accept deposits from cannabis dispensaries. This means that Congress will have to take some action on the banking side sooner rather than later. Once the cannabis banking issues are cleared up, expect the larger commercial carriers to flood the market.

Fourth, remember the basics. Captives are great solutions for best-in-class risks with significant cash to start a risk-bearing company. While 831(b) captives are always a solution for smaller companies, managers should be on the lookout for quality cannabis entrepreneurs with few losses over multistate operations.

Fifth, persevere. Cannabis remains an outlaw in the risk game. There are going to be rabid politicians looking to score points with certain voting blocks by raising up the cannabis villain. Ignore these short-term issues and keep eyes on the prize. The cannabis market is trending upward at an exponential rate. In five years you’ll wish you’d started yesterday.

Matthew Queen is chief compliance officer and general counsel at  Venture Captive Management. He can be contacted at:  mqueen@venturecaptive.com