Underwriters urged to start planning for US cannabis opportunities

Insurers are set to be allowed access to the booming US cannabis market by the end of the year with the hope international underwriters will look to take advantage of the opportunity for new business.

Broker New Dawn Risk has published its white paper on insurance for the US legal cannabis, CBD and hemp markets.  The 2021 report, Opportunity knocks at last in the US cannabis insurance market urges insurers to consider how they can meet the market’s needs once they are legally allowed to write the risks.

Since the publication of the previous report in 2020, US sales of medical and recreational cannabis have grown exponentially, reaching $17.5 billion in 2020, a 46 percent increase from 2019. In addition, the legislative landscape in the USA has been transformed by the arrival of the pro-cannabis Biden presidency, supported by a Democratic majority in both Houses.

A new CLAIM (Clarifying Law Around Insurance of Marijuana) Act has been introduced to the Senate, alongside the parallel SAFE Banking Act, and both are expected to pass into law by the end of 2021.

This will permit insurers to work with the cannabis industry legally; and will also reduce some of the insurance risks that previously dogged the industry.  For example, D&O cover will become a legally available option, and marijuana businesses will be able to regularise their banking and cash operations.

“There are three critical factors when it comes to considering US cannabis,” explained the report. “First, the industry is going to continue to grow at pace, bringing significant opportunities. Second, there is an as yet unmet demand for insurance across a number of classes at every stage of the cannabis production and distribution process. And third, most significantly from the perspective of re-insurers, 2021 looks set to be the year when the major legal barriers to supplying insurance to the sector will be removed.

“As a result, in 2022, the insurance supply chain for this huge industry looks set to be transformed.”

However it added that the interest from international insurers had and remains limited.

“While currently around 30 local insurers provide cover, few large or international insurers have been willing to become involved until now; the legislation unlocks opportunities for insurance and reinsurance, and also makes it possible for cannabis businesses to consider establishing self-funded captives, to build up capital that is set aside to pay for losses as they arise. But this too would pose questions. This is currently a market in waiting, and the time for knowledge-gathering and planning is now.”

The white paper examines the key drivers of growth whilst exposing both the potential premiums and the size of the insurance gap for the cannabis industry in the US.

At present 36 US states, and Washington D.C., have now legalised cannabis for medical or recreational use. Americans now spend almost as much on legal marijuana products as they do on Coca Cola.

During the COVID pandemic cannabis dispensaries were deemed “essential businesses” by many states and therefore remained open during lockdown.

Max Carter, CEO of New Dawn Risk, explained: “The legal and regulatory environment of the cannabis industry has transformed over the past year.

“The changing attitude towards the cannabis industry, and new State and Federal legislation present an exciting opportunity for insurers to work with growers and sellers. With legalisation of banking and insurance, the door seems likely to open to what could be a $1bn premium market.

“On the consumer side, cannabis was deemed an ‘essential business’ during the Covid-19 pandemic, and the growth of the sector seems inexorable. New Dawn Risk is committed to working with carriers and clients to share knowledge and insights to help identify and deliver cover for this untapped market.”

The white paper concluded: “The insurance requirements for cannabis, hemp and CBD farming, production and sales are large and complex.

“Even with new legislation on the horizon, the market will take some time to solve each individual issue for each line of cover required. The challenge, however, needs to be addressed, because the industry opportunity is large and the needs are real. It seems likely that in early 2022 there will be a significant loosening of legal restrictions.

“Insurers and brokers will have to work together, but the results can bring real benefits to a new part of the economy, as well as providing an engaging new opportunity for those who provide cover.”

At present 36 US states, and Washington D.C., have now legalised cannabis for medical or recreational use. Americans now spend almost as much on legal marijuana products as they do on Coca Cola.