Amwins: Cannabis insurance will remain a surplus lines product for 5-10 years

Despite more states legalising cannabis and Congress considering legislation that would allow cannabis-related businesses to access banking products, Amwins has commented that insurance for this area will remain a surplus lines product for the foreseeable future.

In an article, wholesale giant Amwins noted that demand for insurance for the cannabis industry has grown exponentially in a short period.

“And while more states have legalized or decriminalized cannabis, the industry remains relatively untested, lacking the credibility of more established industries,” the broker said. “Which is why, despite the need, the insurance market for cannabis businesses remains limited, as are coverages and policy limits.”

Amwins cited law firm Wilson Elser recently stating that over 30 surplus lines carriers and several managing general underwriters currently service the cannabis industry across many lines of coverage. There are also a handful of admitted carriers that operate in California and, most recently, in Arizona.

More E&S carriers will view the cannabis industry as a viable profit centre and expand into the market, Amwins said. The broker suggested this will happen as underwriters gain more knowledge of working with the cannabis industry and companies experience low claim losses for existing operations.

“Even as more laws are passed in favour of cannabis operations, there are layers of complexities about this industry – indicating that even in five to 10 years from now, this market will continue to remain a surplus lines product,” Morgan Moore, cannabis and life science specialist at Amwins, said in the article.

He added: “That’s not to say this will be the case for other lines such as workers’ compensation or auto, but for property and casualty, it’s a tall order to think that in the very near future the cannabis industry will fall into a standard market.”

As of May 2021, 36 US states and DC had legalised cannabis for medicinal or recreational use. In addition to individual states passing cannabis-related laws, there have been recent developments at a federal level.

In April the US House of Representatives passed HR 1996, the Secure and Fair Enforcement (SAFE) Banking Act, which would allow cannabis-related businesses in states with some form of legalisation to access banking products and services. No progress has been made in the Senate on the bill.

Five key challenges

Amwins identified five key market challenges: cannabis operations are often complex business structures; knowledgeable markets are hard to come by; the industry is still very new; the sales process can be exhausting; and not all policies are created equal.

On the last point, the broker said securing coverage that meets the specific needs of the industry can be challenging.

The National Association of Insurance Commissioners has stated that too many cannabis-related businesses (CRBs) buy policies fraught with coverage gaps and inadequate limits. The association’s Cannabis Working Group believes the biggest risks that CRBs face involve theft, general liability and product liability.

“In most other segments of insurance, brokers are trying to expand the profile of coverages their insureds have — such as explaining the need for cyber and product liability,” said Norman Ives, cannabis specialist with Amwins. “Unfortunately, in the cannabis insurance space, they’re having to spend what little time they have in front of insureds just trying to minimize the holes in their policies.”

Amwins said the top three liability-related policy gaps in most cannabis-related insurance policies are a lack of coverage for vaping products, low-risk health hazard endorsements and limitation in assault and battery coverage.

The broker’s comments on cannabis insurance follow AM Best in a report last month predicting that the market will grow but federal law changes are needed for admitted carriers to join the excess and surplus lines market in providing cover.

The ratings agency said surplus lines insurers have been leading the drive for new products, which in many cases are modified versions of standardised coverage forms.

“However, some industry experts argue that much of the coverage offered is modestly to egregiously overpriced and overly restrictive, with some forms regarded as offering illusory coverage,” the report said. “Capacity in the market is currently limited, with the only choice being excess and surplus carriers.”

One admitted coverage development is the California Department of Insurance approving a suite of commercial liability forms submitted by Golden Bear Insurance Co, as well as a surety bond program offered by Continental Heritage Insurance Company.

AM Best noted that regulators in Colorado, New Jersey and New York are reportedly initiating discussions to encourage admitted carriers to create and provide admitted products for the cannabis industry.