This article was produced in partnership with Amwins.
Bethan Moorcraft of Insurance Business sat down with Norman Ives (pictured), cannabis specialist with Amwins Brokerage in Los Angeles, California, to discuss key considerations for retail agents in the cannabis insurance market.
With the legal cannabis market growing fast throughout the United States, retail insurance agents are becoming more educated on the various exposures cannabis clients present. While some have done a very good job at getting insurance programs placed, it remains a challenge for the industry at large.
At present, cannabis insurance is primarily offered through the excess and surplus (E&S) lines insurance market, which harbors many nuances for retail agents to diagnose and translate for their clients. Beyond the considerations of price and policy language that are traditional considerations of any E&S placement in the cannabis segment, cannabis operators and retail agents should be considering the financial strength of the markets presenting policy options, according to Norman Ives (pictured), cannabis specialist with Amwins Brokerage in Los Angeles, California.
The cannabis insurance market is currently split between a few traditional E&S carriers and managing general agents (MGAs) / managing general underwriters (MGUs) that are using fronting paper from carriers with an AM Best rating of A-VII, meaning they have adjusted policyholder surplus of $50-100 million. This is the minimum financial rating required by most states for carriers to be able to insure a cannabis operation. In addition to that, many MGAs and MGUs in the space offer narrow policy coverages and claims-made and reported settlement terms, and many of the A-VII carriers are using B-rated reinsurance partners.
“The financial rating is one thing that sometimes gets lost in people’s review of the coverage forms and what’s out there,” said Ives. “People will dive into coverage detail and automatically focus on a policy forms or some other nuance that is excluded in the policy and they might not give thought to the other two big elephants in the room, which are that they’re dealing with an A-VII carrier with B-rated reinsurance.”
For the average insurance agent, most policies that they sell are on admitted paper, which means that there will typically be a guarantee fund, so that if an insurance company becomes insolvent, the state would be able to step in and provide at least a nominal amount of insurance recovery until that fund is depleted. That's not true in the E&S world, Ives stressed, which is one of the reasons why it’s important for agents to consider the financial strength of carriers when dealing with E&S placements.
“With E&S lines, you’re not part of an admitted program, so if those carriers go out of business, you have to replace that coverage right away,” Ives explained. “You have to go out mid-term and repurchase insurance for a whole new out-of-pocket expense […] and you have to do that in a fairly quick period of time because these are claims-made and reported policies.
“We're dealing with long-tail liability exposure around product liability. Product liability has a retroactive date, and it builds up over time as an insured maintains the continuity of their coverage. Any interruption in liability coverage could be absolutely catastrophic to these cannabis businesses. Product liability is the most expensive component of insurance; it's typically more than two-thirds of an insured’s total liability holdings. The exposure to a business is hard to overstate when you think about walking away from years of product liability coverage that an insured has paid an exponential rate to secure; they’re losing a very valuable asset in their risk management strategy.”
Despite coming with a higher degree of risk, the MGAs and MGUs using A-VII fronting paper are “relevant players” in the cannabis insurance market, according to Ives, because they’re filling a problematic capacity gap, especially when it comes to property insurance. The property insurance market is hard across the board at the moment, but in the cannabis space, property capacity is critically low due to a lack of carriers willing to participate. The MGAs and MGUs using A-VII fronting paper are a “relevant and necessary piece of the puzzle” for agents piecing together property insurance portfolios for cannabis businesses.
There are some traditional carrier markets with strong financial ratings participating in the space – including an A-XV carrier, an A-XIII carrier, and an A-IX carrier – all of whom are offering claims-made liability coverage that includes a duty to defend, but they’re not offering enough capacity to cater to all of the cannabis market’s insurance needs. Therefore, agents inevitably have to turn to MGAs and MGUs for some capacity.
“Agents need to carry out a risk assessment to consider where it makes sense to use MGAs and MGUs with A-VII fronting paper and where it makes sent to use a more traditional carrier,” Ives told Insurance Business. “The A-VII carriers are quick and easy, and can provide a nice package policy to solve the property and casualty insurance needs of small cannabis operators. But when you get up to the mid- to large-sized cannabis operators and the multi-state operators, they should take a more refined approach to their risk management strategies and how they structure their policy format.
“The MGAs and MGUs may be absolutely critical in helping to fill out a property schedule. Frankly, you’ll struggle to fill out a $40 or $50 million property schedule for an operator if you don't include the MGA markets just based on what's going on in the property market. But on the casualty side, that's not true. On the casualty side, you have traditional insurance carriers available that are quite competitively priced. The price delta between the [minimum requirement] A-VII MGAs and the traditional insurance market is often minimal. Sometimes it's not even there; sometimes the traditional carriers are less expensive. And so, it becomes a matter of the retail agent understanding those nuances and figuring out what’s best for their clients.”
That’s where the disconnect often rears its ugly head. At this time, cannabis is still considered a Schedule I drug under the federal Controlled Substances Act of 1970, so many carriers and agents have been reluctant to engage in and educate themselves around cannabis insurance. But with the ongoing wave of state-level legalization, and the prospect of federal legalization on the horizon, there’s an urgent need for agents to familiarize themselves with the risks and the coverage nuances in the marketplace.
If federal legalization goes ahead, Ives expects to see more traditional carriers stepping into the market, but he predicts they’ll be “somewhat selective” in where and how they participate, based on their company’s history, their risk tolerance and preferences. He added: “A lot of these cannabis risks are never going to fit into an admitted market; they don't fit into a nice clean automatic underwriting box. There are a lot of nuances and different things for agents and operators to consider.
“On top of their usual review of E&S policies, they’ve got to ask questions like: ‘Is this a claims-made policy, or claims-made and reported? Is this an MGA that is borrowing somebody's paper that could suffer a lot of losses and go out of business tomorrow? Or is this an insurance company that's A-XV rated and has other business interests in a diverse risk profile that's going to give them stability?’ These are all important considerations as the legal cannabis market continues to grow.”