The U.S. cannabis industry generated about $29 billion in revenue in 2023, with projected growth to reach $37 billion by 2027. That figure represents a large amount of assets to protect. With so much value comes significant risk, making insurance a critical need for any cannabis business.
While insurance is essential to protect the cannabis business, it hasn’t always been accessible or straightforward. Fortunately, that’s changing, and cannabis businesses are better able to find the coverage they need.
The Cannabis Insurance Landscape
In 2012, when Colorado became the first state to legalize adult-use cannabis, there were only a handful of insurance providers serving operators. Today, the cannabis industry remains uniquely situated when it comes to insurance. Business owners have more options to choose from and more factors to consider than ever.
“Cannabis businesses…experience higher premiums than most other industries, but it has gotten better,” said Isaac Bock, managing director of AlphaRoot, a New York City-based calibrated insurance and risk management solutions firm dedicated to the cannabis and hemp industries. “As more underwriters have decided to work with cannabis businesses, we’ve seen more favorable language on policies — coverage that’s more responsive in the event of a claim and that contemplates exposures cannabis businesses might have.”
In the past, Bock said, underwriters would include elements in their policies like “cannabinoid exclusions,” which made the coverage virtually useless for plant-touching cannabis businesses. This was generally due to a lack of familiarity and education about cannabis businesses, as well as the types of policies they need.
As the cannabis industry has matured, insurance underwriters, AKA the analysts who approve or deny your business a policy based on their firm’s risk parameters, have increasingly broadened their offerings of relevant, effective policies for cannabis operators. Companies like AlphaRoot prioritize educating underwriters and brokers about the realities of cannabis.
“We can act as a bridge between underwriting outlets and the industry itself,” Bock said.
Remaining Hurdles for the Cannabis Insurance Industry to overcome
While cannabis insurance has improved and matured over the past decade, there’s a long way to go. Many remaining challenges result from regulatory complexity and the state-by-state nature of the industry. If and when those barriers fall, larger insurance companies may get involved in the space, which could further drive down policy costs and open additional options for cannabis operators.
“Should a major legislative item come through, whether that’s full legalization or rescheduling, cannabis will get more interest from larger household name insurers,” Bock predicted. “They may bring expertise in the space or form partnerships with underwriters already in cannabis to expand their product offerings.”
In the meantime, doubling down on educating insurers about cannabis and what businesses need in the space remains the company’s most important goal.
“There’s more work to do to improve policy language, exclusions that should be applied, and so on,” said Bock. “Partnering with those focused solely on cannabis helps speed up that process.”
How To Find a Cannabis Insurance Partner
When in need of coverage and looking for a cannabis insurance partner, making the right choice is critical. Companies need a policy that fits their budget and that will cover them in the event of a claim. These three tips can set you up for success.
Work With a Cannabis-Specific Broker
Insurance is always complicated. Double that complexity for the cannabis industry. If you aren’t intimately familiar with how insurance policies work, you need support. Work with a broker or advisor who has demonstrable expertise in the cannabis industry. These professionals know what to look for and the red flags to avoid, so spend some time finding the right one to work with.
“The biggest thing for business owners is to work with a broker, advisor, or consultant who really understands not only the insurance industry but also cannabis,” Bock said.
Have your policy reviewed annually by an expert. Ideally, have this happen 120 days before it expires.
Understand Policy Exclusions
A policy exclusion is a clause that removes insurance coverage under certain circumstances. Some cannabis insurance policies include exclusions that render your coverage ineffective in the event you file a claim.
Before moving forward, you should clearly understand the exclusions in a policy and how they apply to your business. Again, an experienced broker or consultant is critical here. They can spot exclusions that render a policy ineffective, protecting you from paying for insurance coverage that won’t apply when the time comes.
Different cannabis business structures have different policies available to them, thus, different policy exclusions.
Bock said, “It all depends on how the policy is worded, so make sure the policy covers your entire operation.”
Consider Non-Cannabis Exposure
If your business sells both cannabis products and non-cannabis products, you’ll likely need separate policy coverage for each. Most cannabis-specific insurers won’t handle non-cannabis operations and vice versa. Be prepared to seek out policies that cover your entire business. You may need more than one.
“Make sure you get coverage for cannabis-specific items, but also for anything else you sell,” said Bock. He added, “You may need to work with someone who will help you place things that are outside the scope of cannabis insurance.”
Review insurance companies with Green Check Connect
Providers like Green Check Connect Marketplace host a variety of cannabis-dedicated insurance options alongside verified financial services providers to connect with reputable companies on the Marketplace.
Trends To Watch In Cannabis Insurance
Declining Premiums
As more underwriters enter the space and offer cannabis businesses competing policies, the cost of coverage will continue to decline. Expect cannabis premiums to remain higher than other industries, though.
Improved Policy Language
As underwriters become increasingly familiar with cannabis businesses and their coverage needs, policy language should continue to improve. Underwriters are becoming more adept at including cannabis-specific language and ensuring their coverage applies.
Similarly, insurers are offering more than just basic business insurance, with policies that can help your business grow. An example would be adding Directors and Officers (D&O) insurance to a cannabis business’ overall policy, used for attracting top executives.
Increased Industry Participation
As the cannabis industry continues and talk of federal reform heats up in Congress, more insurers than ever are entering the market. Expect that trend to continue as cannabis becomes more normalized, providing a wider range of options to business owners and keeping premium costs downward.
Improved Reinsurance Options
When insurers take on risk, they typically insure all their accounts, or their “book of business.” This process is called reinsurance. When reinsurance options are limited, insurance companies operating in the space incur higher costs. Thus, as more insurers get involved, reinsurance options expand, and insurance company costs should decrease. Those savings can be passed on, in part, to cannabis businesses seeking coverage.
These trends will all be influenced by legislative and regulatory developments. Cannabis reform at the federal level will have a profound effect on cannabis insurance. This begins with signaling from the U.S. Drug Enforcement Agency (DEA), reported on April 30th that they would agree to reschedule cannabis to Schedule III from Schedule I.
When and if those changes take effect, and to what degree, they will have great significance on the cannabis insurance industry. Keep an eye on the news and stay in touch with your insurance partners to know what’s coming around the bend.
Photo by Vlad Deep on Unsplash
