Multiple bills addressing federal cannabis legalization have been introduced before both the House of Representatives and the Senate since Democrats took control in 2021, but none have become law.
Just last month, Senate Majority Leader Chuck Schumer and New Jersey Sen. Cory Booker in July introduced the Cannabis Administration and Opportunity Act, which would remove cannabis from the Controlled Substance Act, also known as “de-scheduling.”
The bill specifies that insurance is among the financial services that would be permitted to engage with the cannabis industry once it is no longer considered a “Schedule 1” drug like heroin and ecstasy.
The House of Representatives has voted on several legalization bills. But the Schumer-Booker bill, like several earlier efforts, has gone nowhere in the Senate. And hopes that the pending bills might become law are fading with the approach of November’s midterm elections, which are expected to flip control of at least the House to the less weed-friendly Republicans.
Jesse Parenti, founder and national director for Nine Point Strategies, a cannabis-focused brokerage owned by PCF Insurance Services, noted that President Joe Biden, despite pledging action on marijuana legalization during his 2020 campaign, has not moved on the issue since taking office.
“His actions are speaking very clearly,” Parenti said, suggesting that the White House’s lack of interest is one of the reasons the legislation is not moving. “Biden is not going to do anything.”
Neither Schumer’s nor Booker’s office responded to multiple requests to discuss their bill’s lack of progress.
Parenti said he expects federal legalization to be an issue in the 2024 presidential campaign.
In the meantime, a half dozen more states are poised to have legalization referendums on their November ballots, potentially expanding retail market sales well beyond the $32bn forecast for 2022 by New Frontier Data, which tracks the industry.
If legalization continues to spread on the state level, New Frontier projects $72bn in sales by 2030 from an industry that includes businesses from mom-and-pop retail shops to multi-state grow operations and edibles manufacturers.
Should federal legalization happen, that market will only grow, and along with it, the demand for “seed-to-sale” coverage including crop, general liability, D&O, property, cyber and transportation.
The legal US cannabis industry would pay about $1bn in annual premiums were it insured to levels normal for other businesses, London-based specialist broker New Dawn Risk estimated last year. The National Cannabis Risk Management Association, a trade group of 3,000 cannabis businesses, has put the figure as high as $3bn.
“The fed government is the only thing that moves slower than the insurance industry,” remarked Matthew Johnson, vice president for Risk Services at QuadScore Insurance Services, the No. 2 cannabis insurer in the US.
Insurance paces cannabis market growth
The number of insurers and MGAs/MGUs offering cover has grown faster than it may seem. New Dawn estimated there were just six in 2020. Sources said that has expanded to about 30 today.
Large carriers and brokers have dipped their toes in the market. Aon’s specialty unit launched the cannabis focused Greensite Insurance Services last year. Marsh has a cannabis business in Canada, as does AJ Gallagher. WR Berkley’s Admiral Insurance Group recently expanded its offerings to include property as well as general liability.
But excess and surplus carriers and specialty MGAs and MGUs dominate the markets.
MGU CannGen Insurance Services is the biggest player, according to JenCap and market sources, while rapidly growing MGU QuadScore, which is underwritten on Trisura Speciality paper, has grabbed a significant piece of the market.
MGA Cannasure, acquired last year by One80 Intermediaries, and SafeHerb, launched last year by Hub International’s MGU platform Specialty Program Group, are both meaningful players, sources said.
The remainder of the market is spread among smaller, often regional, companies like Golden Bear, which focuses mainly on California.
Figures are not published by these private firms, but Parenti ballparked current cannabis industry premiums in the “hundreds of millions” of dollars.
Not an easy market to enter
The revenue potential will surely be enticing if and when cannabis is legalized nationally, but QuadScore’s Johnson suggested that even if that happened immediately, it would take three to five years before the industry’s biggest players got deeply involved in the US market.
That’s because the legalization issue is just one obstacle to building a book of business.
California legalized medical use in 1996 and Colorado became the first state to legalize recreational use in 2012. In the decade since, 39 states have made either medical or recreational use legal. Some of these niche players have spent a dozen years or more building relationships and learning the nuances of the cannabis business.
That includes the myriad regulations that each state has put on the businesses, which play into their coverage needs.
“What you have to do in Colorado varies from what you have to do in Michigan and what you have to do in California,” said Jason Scheurle, national cannabis practice leader at Burns & Wilcox. “Each jurisdiction has their own compliance requirements.
“It’s essentially preventing insurance companies from creating a single product,” he said.
Some of the industry’s unique risks also pose challenges.
You can get a bank account. It’s going to cost a little bit more than a regular bank account
Theft is a major concern, because cash is still king in the cannabis business, thanks to the federal ban. A majority of cannabis companies – as much as 70% according to the National Association of Insurance Commissioners – rely on cash, but a growing number are finding ways to engage with banking and payment services despite the federal obstacles, again, at a price.
“You can get a bank account,” Johnson said. “It’s going to cost a little bit more than a regular bank account. But there are dozens of banks that provide services to the cannabis industry.”
JenCap vice president Erich Schutz said the industry by nature creates “a target rich environment,” not only with its high use of cash, but also because of its product, pointing to issues like storage. “Most carriers won’t cover stock that’s not in the vault or a safe outside of business hours.”
Demand for data
Early entrants to the business have also been gathering data, which provides an advantage. With no actuarial data on the cannabis market publicly available, many larger insurers are cautious about diving in.
“You’re never going to get credible data,” said Kieran O’Rourke, director of underwriting at Cannasure. “There’s nowhere near the numbers to really get honest to goodness claims data in the vast majority of states. The data’s not credible yet.”
But experience helps. For instance, O’Rourke said fire can be a unique risk for indoor grow operations because many growers use high intensity lightbulbs that can pop. “This has become a little mini crisis for some of us underwriters,” he said.
Underwriters that have dealt with the industry look down on that type of lighting and are pushing safer LED lighting, he said.
There’s nowhere near the numbers to really get honest to goodness claims data in the vast majority of states
QuadScore’s Johnson suggested it would take a major market player 24 months to get into the space once legalization occurs. “We’re not terribly worried about the impact on our business prospects,” he said. “It’s not something where you can just put your pinky toe in the water and expect money to flow in.”
Jay Virdi, chief sales officer for Hub International’s specialty practices group, which brokers about $135mn in cannabis-business related premium per year, agreed. “The lack of long-term data, that makes it uncomfortable for the companies to jump in,” he said. “Once legalization happens, there will be a learning curve.”
O’Rourke was less sanguine. He expects that with descheduling will come an influx of big companies and competition that will be harder to beat.
“Smaller programs that aren’t named Travelers or whatever, with the billions that they have behind them, are going to be at a disadvantage if the big guys get in,” he said. “It would not be great for us if marijuana was suddenly descheduled.”
He stressed, however, that many of the insureds are likely to have a mindset that may work to the advantage of smaller companies. “The fact is though, for the consumer of our insurance products, I honestly think that they don’t want to see Travelers or Liberty Mutual,” he said.
Beyond the distance from big corporations, the E&S market can be more nimble, he said.
“I can respond to pricing today, I can respond to forms today,” O’Rourke said. “If the bigs get in, this is all going to be admitted and it’s going to move at a snail’s pace.”
