E&S carriers eye cannabis risks to gain first-mover advantage

Excess and surplus (E&S) lines players able and willing to move first and write directors’ and officers’ (D&O) lines in the rapidly growing cannabis industry will gain critical first-mover advantage and ultimately reap the rewards, Alex Buschmann (pictured), vice president at Florida-based advisory and broker Risk Strategies, told Intelligent Insurer.

“The level of comfort is definitely getting there,” said Buschmann, commenting on the evolving approach from select carriers. “Whoever decides to be first can do this the right way” and leverage a decade’s worth of data waiting to be properly applied.

In the US cannabis remains an illegal substance at the federal level—yet many states have authorised its recreational or medical use, resulting in a burgeoning new industry, which requires insurance. Moves are afoot to create a so-called “safe harbour” at a federal level for insurers wishing to write these risks. Legislation has been passed by the House of Representatives; as yet, however, the Senate has rejected the bill.

This has meant that the biggest nationwide admitted insurers are taking a cautious approach for now on concerns over the impact of the federal drug ban. But only for now. “I think they have all done their homework in the background and when this goes federally legal, they will all jump in,” Buschmann said.

For now, the cannabis industry struggles to achieve homogenous coverage across jurisdictions. Only a smattering of chiefly E&S carriers are dabbling in the market. Buschmann cites cases where three to four different carriers have been needed to secure coverage of some $20 million.

Barriers to growth could be about to fall. With the cannabis industry increasingly populating with financially savvy leadership and rates in the D&O insurance market starting to settle following years of hardening, supply and demand may line up to generate reasonable prices, Buschmann said.

“We’re no longer dealing with inexperienced CFOs,” Buschmann said. C-suite leaders have migrated from a full swathe of successful industries, ready to fall in line with Buschmann’s conviction that D&O is the “single most important” coverage line for the industry. “The conversations are a lot easier to have,” he said.

Five years back, virtually everything was an obstacle to deals. “You take a litigious country and a very hard D&O market, then throw the word cannabis on top of it and you had a really expensive policy,” Buschmann said.

But this is a growth industry—and an opportunity for insurers. The cannabis industry went from $12.1 billion in revenue in 2019 to $25.2 billion in 2021. There are risks to cover.

A once-sceptical insurance industry may now be ready to get comfortable with the cannabis industry. Buschmann cited a 2019 study naming cannabis as one of the sectors insurers are most wary of, along with publicly traded life science firms and crypto/blockchain.

Of the three, he says, cannabis is the easiest sell. “You grow a product, you package a product, you sell a product.”