Captives can fill the insurance gap for cannabis companies: KPMG

Significant obstacles are blocking insurers from engaging with the cannabis sector. A new generation of cannabis companies engaged in this business in Canada and other markets where it has been legalised  should consider launching captives to manage their risk, according to Mark Allitt, managing director at KPMG in Bermuda.

Heavy regulation makes the cannabis industry potentially interesting to insurers because heightened levels of oversight tend to limit loss frequency and severity, noted Allitt. However, commercial insurers remain cautious on the sector as they grapple with inconsistencies between different jurisdictions, he said, particularly between the US, where cannabis is still illegal, and Canada, where the industry is thriving.

Insurers also lack underwriting expertise in this sector, while a lack of historical loss data makes it difficult to anticipate claims and set rates, said Allitt. Coverage terms and conditions also remain basic.

These factors are less of an issue for captives, according to Allitt. Captive owners engaged in the cannabis industry will have their own loss data and forecasts. A lower cost base than commercial insurers means captive premiums are not impacted by the cost of capital, administration costs or profit margins. Captives also have access to the reinsurance market, which offers wider coverage and reduced pricing compared to the commercial market, he added.