Insurers are preparing for a possible tenfold increase in sales in the cannabis sector – already a $17.6 billion-per-year industry – as Congress moves closer to legalizing marijuana at the federal level.
Currently, cannabis is legal for medical or recreational use in 36 states and the District of Columbia. However, insurance for growers, testing labs and retailers has been largely stymied by federal laws that criminalize pot, according to a Reuters report. The insurance industry only wrote about $250 million in policies for the cannabis sector last year, and only a handful of carriers offer limited property and liability coverage.
Businesses also need coverage for crops and theft, as well as larger payout limits, insurers and cannabis business owners told Reuters.
While Congress debates bills that would ease federal restrictions, some insurers are already trying to bridge the coverage gap. Since insurers are regulated at the state level, they can offer coverage in states where marijuana is legal. Federal decriminalization would expand this market.
“There is an overwhelming need for the right kinds of insurance,” Rocco Petrilli, chairman of the National Cannabis Risk Management Association (NCRMA), told Reuters.
The NCRMA is a trade organization of more than 3,000 cannabis businesses. In April, it set up a captive insurer to offer its members coverage for property, general premises liability and product liability. It plans to add workers’ compensation and auto coverage in the fourth quarter, Reuters reported.
CannGen Insurance Services, a national managing general underwriter for cannabis, CBD and hemp risks that works with commercial carriers, plans to offer directors and officers and employment practice liability in the near future through a new division called CannGenPRO.
Some large insurers like Progressive, Farmers Insurance, Liberty Mutual, and AXA SA are also offering cannabis coverage as legal pot expands. They often sell the coverage through subsidiaries and work with CannGen or other MGUs, Reuters reported.
But the industry needs expanded protection, according to cannabis business owners who say that current coverage is often hard to find and expensive. Cannabis dispensary owners told Reuters that their insurance premiums are 20% to 30% higher than other retailers would pay. Some kinds of vehicle coverage can cost four or five times more for cannabis businesses.
D&O insurance is also expensive, Gavin Kogan, CEO of cannabis cultivator and distributor Grupo Flor, told Reuters. Flor said he pays between $85,000 and $100,000 per year for $1 million in D&O coverage, “and the coverage is super limited.”
A lack of coverage can also raise costs for businesses. Gene Brown, a California insurance agent who specializes in cannabis coverage, told Reuters that low coverage limits on cargo insurance, for example, can force cannabis companies to split shipments.
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“You have big fleets delivering large amounts of cannabis or transporting large amounts of money,” Brown said. The fleets need $1 million of coverage, but “you can only get $500,000 right now.”
However, that could change if the federal government legalizes cannabis – something US lawmakers are under increasing pressure to do as more states decriminalize pot.
Last month, Senate Majority Leader Chuck Schumer (D-N.Y.) introduced a draft bill to legalize cannabis. In April, the House passed a bill that would allow banks to provide services to cannabis companies in states where it is legal.
Schumer’s bill is unlikely to become law in its current form due to Democrats’ razor-thin Senate majority, Reuters reported. However, such bills show that Congress is at least coming around to the idea of looser cannabis laws. Market research firm BDSA expects some form of federal legalization next year.
Petrilli said that federal legalization could boost insurance sales to cannabis businesses to more than $3 billion over the next five years.
“Whoever leads on providing reasonably priced insurance for this industry with the necessary coverage is going to be very, very successful,” he told Reuters.