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US cannabis is a burning issue for the insurance industry

The article below, by George Styles, Professional Risks Broker at New Dawn Risk, was originally published in Insurance Day magazine on 28th February 2020.

Steps are being taken to legalise marijuana, but the opportunity is too significant for insurers to hang around for the law-makers to catch up with the market

The legal medical and re­creational marijuana industry in the US is already sizeable. In 2018 it was estimated at $10.4bn, outstripping the American population’s collective spending on Netflix.

This is set to grow further. Marijuana companies raised $13.8bn in funding in 2018, four times the amount raised the previous year, according to cannabis industry research firm Viridian Capital Advisors. With a growing number of states voting to legalise marijuana, a report by AM Best released last year forecast the market for legal sales is projected to increase to $22bn by 2022.

The industry already employs hundreds of thousands of workers, spanning a range of business segments. These include cultivation, processing and harvesting, manufacturing, testing, distribution and retail. Each business has need of protection against a selection of specific risks including crop insurance, equipment breakdown, motor liability, directors’ and officers’ liability, errors and emissions, cargo, employee theft and so on. But despite this growing demand, many carriers are reluctant to get involved.

Unusual situation

The US cannabis industry is operating in something of an unusual situation at the moment. Thirty-three US states and the District of Columbia have laws allowing the use of medical marijuana. Ten of those 33, as well as DC, have legalised recreational marijuana. However, the plant remains illegal under federal law as a Schedule 1 drug.

As a result, it is difficult for companies in the cannabis industry to secure banking and insurance relationships. The Lloyd’s market, for example, does not provide coverage for businesses in the US because of the drug’s federal status as an illegal substance. In contrast, it does in Canada, where its use became legal in 2018.

Insurers are wise to be wary – this is something of a legal minefield. For example, the Federal Bank Secrecy Act requires financial institutions – including insurers and broker-dealers – to report to the Department of the Treasury any transactions in excess of $5,000 they have reason to believe involve assets derived from illegal sources. The penalties for failing to do so are severe, including prison terms.

Elsewhere, the Money Laundering Statute makes it a felony for any person to engage in a financial transaction the individual knows involves the proceeds of an unlawful activity. This would include any activity involving (directly or indirectly) the proceeds of cannabis and penalties include up to 20 years in prison.

Crucially, enforcement of these laws depends on the view of the attorney-general, who directs the attitude of the Department of Justice with regards to prosecution. In 2019, attorney-general William Barr said he will not pursue cannabis businesses that are operating legally within their state jurisdiction. However, insurers have no assurance these comments extend to financial institutions engaging with can­nabis businesses, nor is there any guarantee the policy extends beyond the tenure of the incumbent attorney-general who made this statement.

On top of this is the judiciary, which, all the way through to the Supreme Court, has shown a more consistent willingness to affirm and uphold criminal prosecutions involving cannabis.

Moving forward

Against this backdrop, carriers are unlikely to enter into the market until marijuana is decriminalised at the federal level and banking regulations change. However, we are seeing steps being taken towards legalisation.

For example, the Secure and Fair Enforcement Banking Act, which would enable banks to offer loans and other banking services to marijuana businesses, including contractors and vendors who never touch the plant, passed through the House of Representatives last year, but it is uncertain if or when it will get through the Republican-controlled Senate. Meanwhile, the Marijuana Opportunity, Reinvestment and Expungement Act, which would remove marijuana from the Controlled Substances Act, continues to make slow but steady progress though the House.

While it is exceedingly unlikely this legislation will be passed this year, it seems certain to be at some point – the momentum behind legal marijuana appears unstoppable. The insurance industry cannot afford to wait and is not hanging around for law-makers to catch up with the market.

In December, the National Association of Insurance Commissioners’ cannabis insurance working group approved a white paper outlining the challenges for the insurance industry in regulating cannabis and establishing a guideline for state insurance regulations. In the same month, the US National Cannabis Risk Management Association set up a member-owned insurance company to help it manage and transfer its risks.

These are positive steps forward but there are clearly issues still to be resolved. This is an emerging area and insurers are just finding out the full scope of the risks they may have to deal with and the types of claims they may get. This means both personal and commercial lines insurers need greater access to quality statistics on actual losses. That will come through studying early claims in states where marijuana has been legalised to help determine their risk appetite.

Ultimately, the size of the opportunity is significant – all stakeholders in the insurance industry need to work together to understand the issues and develop innovative solutions to be able to maximise it

George Styles is a professional risks broker at New Dawn Risk

The original article can be viewed here