General Business

Cannabis: New Opportunities for Insurers, But With Burgeoning Risks

Moves to expand the availability of medical and legalized recreational marijuana, coupled with projected future growth, position the industry as an emerging market for insurance carriers, according to a recent report from Oldwick-based AM Best.

A new Best’s Special Report, titled, “Cannabis: New Opportunities for Insurers, But With Burgeoning Risks,” states that both medical and recreational marijuana are a rapidly growing business, with revenue that rivals popular industries in the United States such as coffee and movie tickets. In 2017, sales of legal marijuana reached $8 billion ($5 million medical and $3 million recreational), while sales of illegal marijuana reached an estimated $42 billion. With a growing number of states voting to legalize marijuana, the market for legal marijuana sales is projected to increase to $22 billion, and illegal marijuana sales, to decrease to less than $5 million, by 2022, according to the report.

Despite the industry’s rapid growth, the integration of marijuana coverage for carriers has been slow and steady. As the industry matures and insurers gain greater access to quality statistics on actual loss history, insightful actuarial data, and more clarity on the effects of cannabis, more carriers are likely to enter the market.

One key challenge for businesses (and insurers) is deciding which coverage is needed—or not needed. Most marijuana businesses need general liability and product liability coverages, as well as property liability coverage, to protect against accidents and injuries that occur on a business’s premises.

Most insurers who are just entering the marijuana market are offering a core set of policies that usually consist of the following:

  • Commercial general liability, with limits of $1 million per occurrence/$2 million aggregate;
  • Property liability, with limits of $1 million per occurrence/$2 million aggregate; and
  • Product liability, with limits of $1 million per occurrence/$2 million aggregate.

However, these limits may be inadequate for marijuana businesses owners, who may need higher aggregate limits. Because this is an emerging market, insurers believe that risk in these businesses is best managed with their current limits. Another reason for the low limits is the challenge of finding reinsurers to back marijuana-related books of businesses, as reinsurance is typically a separate book or tower to cover these risks. Other problems for business owners are the shared limits between general liability and product liability, as well as non-stacking endorsements, which limit the amount of coverage available to an insured. Many of these policies also lack a duty to defend—a significant issue for marijuana businesses.

The market for insurance products for the cannabis industry will develop as both education about the potential risks and the regulatory environment evolve. More risks are likely to emerge as the long-term effects of proliferating drug usage emerge, particularly for workers’ compensation and auto coverage.

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