By Tony C. Dreibus
A decision late last month by Lloyd’s of London to exit the cannabis industry may change the dynamics of the marijuana insurance market and usher in higher rates for cultivators, processors, retailers and ancillary companies.
The move by the 327-year-old company, which has offered policies to the marijuana industry for more than a decade and is among the largest insurance firms working with the sector, could convince other businesses to pull back as well, said Robert McVay, an attorney with Seattle-based Canna Law Group.
“People…are worried that other carriers will say, ‘If Lloyd’s is thinking about this, then maybe we should as well,’” McVay said. “It doesn’t mean they will come to the same conclusion, but it is a concern.”
Patrick McManamon – the founder and managing director of Cannasure, an Ohio-based wholesaler of insurance products that works with both customers and agents – said he expects the pain will be short-term and that marijuana companies will no doubt be able to find alternatives. But they should expect to see their coverage plans change, and businesses could see rates rise – especially companies in newer MMJ markets.
“It won’t be difficult to find another insurance company, but (business owners) may not get exactly what they had originally, and it may cost more to buy back certain endorsements,” McManamon said.
The policy change by Lloyd’s came as a surprise to many in the industry. The company sent a memo on May 29 instructing its underwriting subsidiaries to stop offering insurance products to U.S. marijuana companies because cannabis is still federally illegal. Existing coverage will continue under current contracts expire, but the subsidiaries were told not to renew such policies.
Lloyd’s doesn’t actually provide coverage. Rather, it operates an insurance marketplace similar to a stock or commodities exchange, and works with “syndicates” that underwrite businesses. Those syndicates transact with London-based brokers who deal with companies around the world that provide insurance to businesses, some of which offer coverage to marijuana companies.
Several insurance firms such as Cannasure work with several carriers other than Lloyd’s. Others, however, deal only with the insurance giant, meaning they’ll have to scramble to find other companies to help them provide coverage.
Greenpoint Insurance Advisors LLC in Parker, Colorado, is one such company.
JB Woods, its president and founder, said he’s currently evaluating carriers with which to work. In Colorado, it’s easy to find insurance offerings, he said. That’s not the case in states with new programs such as Illinois and Massachusetts, which will probably see the biggest bump in rates because there are so few players in those markets.
Regulated markets such as Colorado and Washington State have more insurance offerings because indemnity companies are more familiar with the laws and regulations that govern the industries. Because the risk is higher in new states, fewer companies are willing to set up shop. Fewer companies and fewer choices always translates to higher prices, Woods said.
“In new markets, a number of the carriers stepping into those all go back to Lloyd’s of London,” he said. “The wild card is, which carriers are going to step into these new markets.”
To offset a rise in insurance costs, cannabis companies should look internally at ways to manage risk so they don’t have to buy a policy for every aspect of their businesses, he said. Lloyd’s of London’s exit has put a “renewed emphasis” on risk-management policies.
Cannabis companies can help mitigate risk by making sure compliance officers verify that everything from testing to plant counts are on the up-and-up. Human resources managers should also guarantee all HR issues are resolved, Woods said.
Woods said he doesn’t buy into the theory that smaller insurance companies will exit the cannabis industry en masse the way banks have done in recent months because policies covering marijuana businesses are profitable. That makes the industry attractive to insurers like Lloyd’s.
Cannassure’s Mcmanamon agreed, saying the move could actually open the door for new carriers to enter the marketplace.
“The crux of when insurance companies come and go usually has to do with losses, and in this industry there haven’t been massive losses,” McManamon said. “There is going to be some disruption, but I don’t think it’s going to be catastrophic like banking because insurance carriers our there are willing to underwrite this business. The industry has grown so quickly, companies are taking notice, and (Lloyd’s exodus) is an opportunity for some shrewd people to come in and pick up that business.”
Tony C. Dreibus can be reached at firstname.lastname@example.org