The article below was originally published in Cannabis Law Report in July 2021. You can access the original article here.
Sean Hocking of Cannabis Law Report recently spoke with Max Carter, the founder and principal at New Dawn Risk, about insurance and risk in the current US cannabis market. The following interview was conducted on 8th July 2021.
Now that we have a Democratic administration with a majority in both houses, what are your feelings about the growth of the insurance market for cannabis as the federal legislation conversation edges forward?
There is a great deal of excitement in the insurance industry at the opportunities the cannabis market will present. We are pretty certain we will see a large number of players being willing to get involved as soon as they have the certainty that they won’t be breaching any federal regulations.
At CLR we have noticed that in some states there has been a marked increase in cannabis insurance services for the sector over the last 12 months. Are you able to give us any insights about what is happening in states like CA, IL, FL and whether comprehensive services are being offered to industry players, or are companies having to string together a patchwork of coverage from different insurance suppliers?
California, Illinois and Florida are in the top five states when it comes to general property and casualty insurance, so we would certainly expect them to be where there is more activity taking place.
As for suppliers being willing to provide a comprehensive suite of cover to cannabis businesses, it does very much depend on the size of the entity being insured and their activities.
Some classes of insurance, in particular, remain very challenging for larger companies, such as directors’ and officers’ liability for listed companies.
Do you think that NY’s recent move towards legalisation and developing a regulated sector will help with providing both greater opportunity for insurance providers as well as better options for companies and organisations looking for coverage?
We don’t think we are going to see any particular difference in approach for New York compared to other large states at this point.
The key to really unlocking the market for insurance will be the passing of the Claim Act.
As mentioned above, providers in the main areas appear to be US state-based organisations providing limited coverage on a state by state basis. Do you concur with this analysis?
Yes, absolutely at the smaller end of the spectrum coverage is being provided by local state-based carriers.
Where we see international interest is more on the larger risks, although at this point there is very little capacity in the market for US risks with very few exceptions (such as Relm in Bermuda).
There really is no international appetite to write US cannabis risks. This is for the same reasons as domestic carriers, namely that they don’t want to fall foul of federal regulators and risk their ability to trade in the US for all of their business.
If you were to highlight where coverage is most needed in the industry are there certain sectors that you feel need solutions now rather than later?
For most businesses, product liability is an essential coverage and it would be nice to see a stronger supply of this coverage being available immediately.
Outside the US and especially in the EU & UK – where there still isn’t really any hard and fast regulation with regard to cannabis but an ever-increasing amount of CBD, medical cannabis & hemp businesses launching in the sector – what options are there for these companies to get coverage?
The market is still very limited in the UK and EU because of the lack of clarity around the regulation of CBD, medical cannabis and hemp.
However, solutions are available.
We think that there needs to be more clarity around regulation in order for insurers to enter the market with enthusiasm.
New Dawn Risk has today launched its latest white paper on insurance for the US legal cannabis, CBD and hemp markets. The 2021 report is called “Opportunity knocks at last in the US cannabis insurance market”.
Download the white paper here.
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 at last 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.
The updated 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. Headlines include:
- 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.
- Cannabis dispensaries were deemed “essential businesses” by many states and therefore remained open during lockdown.
Max Carter, CEO of New Dawn Risk, commented: “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.”
Notes to Editors
Established in 2008, New Dawn Risk is a dynamic, specialist insurance intermediary providing bespoke advisory solutions. We focus on complex, international liability and other specialty insurance and reinsurance. Clients large and small profit from our expertise, creativity and responsiveness – from risk assessment through to claims. 95% of our business emanates from outside the United Kingdom.
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.
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.
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