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Profitability with the Right Insurance Partners
Insurance carriers have been curious about insuring the marijuana industry for quite some time as they’ve quietly dipped their toes in the water wondering if its safe to swim. However, the challenges associated with this business segment such as cannabis being federally illegal and the ability of the carrier to generate underwriting profits has left many of them on the sidelines. We’ve witnessed the aftermath when insurance carriers who offered coverage to the industry exited after a couple of years with no reason. We speculate their business model was incorrect, failed to perform adequate due diligence, or a senior executive of the company realized a subsidiary was insuring marijuana who wanted out.
In our experience, insurance companies profitably insure cannabis with thoughtful consideration before entering the marketplace, if they use the right surplus lines broker and retail insurance brokers (“retailer”) with the right background.
For those who may not know there are four parties involved when buying marijuana insurance. They are the cannabis business, retailer, surplus lines broker (a.k.a Excess & Surplus Lines), and insurance company. The process of purchasing marijuana insurance is accomplished by contacting a licensed retailer to complete the application process. The application is submitted and underwritten through a licensed surplus lines broker who essentially represents the insurance carrier. The surplus lines broker is responsible for quoting and policy issuance, claims processing, and communication with the insurance carrier.
The right questions will help develop your cannabis insurance program
Insurance carriers must ask the right questions before entering the marijuana industry to avoid surprises and set the appropriate expectations.
Typical questions or methods of evaluation include:
- Does the surplus lines broker have experience with underwriting cannabis risks?
- What has been their claims experience?
- What is their total premium for cannabis related risks?
- What type of operations are being insured?
- How profitable is the book of business?
- Have you evaluated existing applications and underwriting processes to determine the quality of the business?
- What retailers are the surplus lines broker utilizing?
- What products are offered and needed?
The insurance carrier must evaluate the level of experience of the underwriters and retailers involved with cannabis insurance procurement. For example, a seasoned retailer will recognize important coverage limitations setting the right expectations with the insured before placing insurance. Or, the underwriters will be able to identify application questions of significance that could harm the relationship between the retailer and their clients or circumvent unwarranted claims. The relationships with all parties must be collaborative versus adversarial. Otherwise, this can lead to underwriting friction and contracts being terminated.
The surplus lines broker or retailer that has a large share of licensees such as retail stores, dispensaries, manufacturers, and cultivators in the book of business is preferred. A mixture of licensees and ancillary companies has more underwriting challenges due to unknown risks associated with the latter segment. The age and continuity of the book of business provides insight with retention, claims history, types of claims, statistical data, and overall profitability that can be used with forecasting.
The surplus lines broker who cast a wide net of retail insurance brokers can have disastrous consequences
The surplus lines broker who contracts with a large number of retailers that insure a small number of cannabis operations is designed to cast a large net over the marketplace and rapid growth. The challenge will be managing the consistency of the underlying risks and chaos when utilizing inexperienced retailers with few clients and minimal expertise. Those underlying risks will include relying on the retailer to effectively communicate the scope of the cannabis operation, avoid ambiguities, and discussing important warranties and exclusions with the insured. For example, many retailers fail to understand the consequences of not addressing specific security requirements when insuring the actual cannabis. Their failure can lead to claims being denied. Or, the retailer who procures product liability insurance through a carrier that will not insure recreational cannabis operations, but exclusively medical. Both of these situations will use valuable resources that could have been more effectively allocated to more profitable endeavors. The latter example was a relevant matter in a recent cannabis product liability lawsuit in Colorado that was settled.
Thus, cannabis insurance carriers have no interest in business from the retail insurance brokers who essentially force policies through underwriting with minimal documentation or perform with minimal due diligence. A cannabis insurance lawsuit between Green Earth Wellness vs Atain Specialty Insurance Co. for smoke damage to living plants is an example of communication among the parties that appeared disjointed or warranted further clarity. Green Earth believed through its retailer referred initially by an Atain representative that living cannabis plants were covered on the policy. This, despite disclosures from Atain Specialty and underlying policy that seemed to define stock as anything other than living plants. The lawsuit was settled between the two parties that could have been avoided with additional documentation and processes to offer evidence of the parties mutual intent.
Insurance carriers will be profitable insuring cannabis operations only through a strategic relationships that has been validated through experience.