8 July 2021Actuarial & underwriting

A new cannabis group captive

In the US, cannabis is a Federally prohibited schedule 1 narcotic in the same class as heroin. That includes products and mixtures that contain it as well as the kind people smoke for health or pleasure. The prohibition extends to those who sell such products or deal with it.

There are those who argue that cannabis does not meet the criteria under the Controlled Substances Act and so should be permitted for medical and recreational use—and removed from federal control.

“In all ways possible we intend to operate and manage CLIC according to normal insurance standards.” Chris Payne, CLIC

Many US states—33 so far (plus Washington, DC)—have legalised the use of cannabis for medical purposes. Some, including California, have eased the permission to sell and commercialise it for recreational purposes.

This creates a grey area, where local state regulations are eased, but Federal prohibition remains in place. Banks, which are influenced by the Federal government through regulations and the Federal Deposit Insurance Corporation (FDIC), resist dealing with cannabis retailers or processors.

As an example of this resistance (“we really would rather not have your business”) in Nevada, one of the 33 states where cannabis licensing is possible, one small local bank was willing to open bank accounts for cannabis retailers provided that each applicant maintained a balance of $250,000. Even that bank later decided not to offer any financial services after nine Federal bank examiners appeared at the bank’s offices to begin a special examination.

Getting cover

In states that allow the licensing of cannabis for processing and sale, insurance coverage is a requirement. But where insurance is available, it is very expensive, with rates of 50 to 100 percent on line not unheard of. The difficult lines are general and products liability, and directors and officers (D&O) insurance.

Chris Payne is the originator and chief executive officer of CLIC, an unusual new risk retention group (RRG) that is just getting started in the face of Federal obstacles, and resistance by insurance and banking interests, to provide coverage and financial services to the retail cannabis “industry”.

Payne knows of only about six companies willing to entertain submissions for coverage, none of them household names in the insurance industry, and all of them charging “extraordinarily high rates”.

He cites an example of a cannabis business using delivery vans for transporting products to its outlying retailers. The insurance quote for a small fleet was $200 per van per month for $1 million per occurrence, $2 million in the aggregate. The rates from CLIC, backed by its actuary, will be about half that.

High rates and lack of capacity are the ideal atmosphere for starting a captive. And this one, as an RRG, will be policyholder-owned and controlled.

The usual way of getting an RRG started was to put together a founding group and then add members. Instead, the Nevada Commissioner of Insurance granted the CLIC RRG a certificate of authority based on modelling of the expected number of members, annual premiums, and expected losses over the next five years.

The Certificate of Authority included a Certificate of Dormancy from the outset to help the organisers hold down costs and administration until CLIC started issuing policies. This is unusual in the captive insurance area, showing the flexibility of the Nevada Division of Insurance.

CLIC intends to offer $1 million to $2 million coverage for general and product liability only, using what Payne describes as a “partly manuscripted form” based on claims-made coverage. There will be layers of reinsurance placed, as well as aggregate protection for the RRG as a whole.

CLIC will be as traditional as possible, with members serving on the board and making most of the important decisions. The initial capital required from new members will be the standard one year’s premium.

Besides promoting membership directly by CLIC and its founding members, brokers will be invited to bring in their clients to be members. CLIC will start to issue policies when the number of initial members’ capital reaches $1.5million. Payne expects that 75 to 100 members, large and small, will be a reasonable number to be enrolled by the end of the first year.

Risk management is the key

Payne has outlined the standards and protocols that members would be expected to adhere to, as well as the inspections and annual operations reviews.

“This will be the cornerstone of our whole CLIC structure,” says Payne. “Our risk management programmes will make us credible to regulators in all states. In all ways possible we intend to operate and manage CLIC according to normal insurance standards, relying on actuarial studies when called for, and providing total transparency for auditors and regulators.”

A large Western state’s managing general agent, IMA, has agreed to introduce CLIC to its multi-state clients, a sign of growing interest in the programme.

Group captives are not very prevalent outside the US. There should be more of them. The CLIC group captive success story is the kind of story we like: an insurance crisis, a group of businesses that need coverage, and an organiser willing to help them take the risks that have to be taken. The flexibility of the domicile regulators is important, too.

Chris Payne can be contacted at:

Hugh Rosenbaum is a former principal at WTW. He can be contacted at: