The Evolution of the Emerging Cannabis Industry, cannabis insurance specialists

The Evolution of the Emerging Cannabis Industry

Opinions on the emerging cannabis industry are so numerous that they are beyond my ability to track them. Everyone is either claiming to be an authority on the business of legal marijuana, or are striving to become the authority. The truth is that nobody is a complete authority on legal cannabis. It is still too new of an industry, and the proof is how inconsistent the rules and regulations pertaining to marijuana/hemp/CBD vary from state-to-state, and within each state!  One moment Michigan has a restricted medical marijuana program, the next moment they have legalized adult-use marijuana. How can anyone be an authority, when fragmented state and federal regulations continue to evolve?

You should all know by now the largest barrier to entry into this industry is the Schedule 1 status of cannabis. This particular legal barrier unavoidably looms in our background everyday. Attending B2B cannabis conferences, from smaller more intimate ones such as C-LAB events to massive conferences like MJBiz, I consistently listen to speakers, vendors and attendees bring up the same topics. All of these cannabis conferences serve to educate and communicate, but no matter where I go people still talk about banking restrictions, merchant service problems, taxes being too steep to turn a profit due to IRS Tax Code 280E, inability to engage in interstate commerce and all sorts of marketing challenges. For us of course, it is the barriers to suitable marijuana insurance policies that we focus on the most.

How long does it take for a state regulated body to be funded, staffed, implemented, grow and stabilize? Depending how fast current laws are adopted or changed, it will take a long time and a lot of discussions as to how the cannabis Industry, the federal government and the cannabis approved states will come together to implement best in class licensing and regulations, product quality standards, taxation and enforcement. Through this evolution of an industry, we will witness successes and failures along the way.

Look at Massachusetts, voters legalized adult-use marijuana in 2016, and it took over two years for sales to begin with only two dispensaries allowed to open by December of 2018. Florida has multiple lawsuits filed over unconstitutional medical marijuana laws that do not match what voters approved in 2016. State laws are changing on a regular basis and have not even stabilized in states like Colorado and Washington which began selling adult-use cannabis in 2014 and medical marijuana well before that.

The evolving marijuana industry is full of so many financial and regulatory uncertainties that insurance policies for cannabis companies are not consistent from one carrier to another. Marijuana insurance companies like S2S Insurance Specialists have to stay current with many state and federal regulations. Federal prohibition continues to plague the cannabis insurance industry by preventing it from operating in a free market environment. These restrictions have made most big insurance companies reluctant to enter the cannabis market place, therefore we are restricted to a couple of surplus lines carriers.

Best practices in business are still evolving in the cannabis space. The time for cannabis entrepreneurs to build, scale and stabilize their businesses is now! We have all read and heard about the growth projections of the cannabis industry. Projections that cannabis will represent the next $20 billion industry are probably conservative. We will eventually rival the multi-billion dollar snack, alcohol and pharmaceutical industries. As companies scale up, management teams become the forefront of any successful operation.

Most professionals I have met have pivoted into the cannabis Industry from other specialized professions. Like myself, they see an opportunity to do something new and exciting. We need to bring the best of our skill sets to this very young and emerging industry. Come into this industry with your eyes wide open. The opportunities in cannabis are great, but the competition is fierce. It takes more than just a love of marijuana or the passion of wanting to see the social injustice of marijuana prohibition come to an end. It takes a strong understanding of the fundamentals of business. It takes organization and constant research to understand the next big trend or new state mandated rules.

As cannabis insurance specialists, David and I stay current on industry trends, data points,  cannabis research and the full spectrum of the supply/distribution chain. The biggest problem we all face in this young emerging industry is the lack of credible and actionable data. Like most institutional markets, insurance relies heavily on the data acquired across the industry in order to rate, compare and assess risk. We also follow current industry news and insurance trends in cannabis.

The most recent industry change was the passing of the2018 Farm Bill. It allows for broad cultivation of hemp, not simply pilot programs for studying market interest in hemp-derived products. Its language clearly allows for the transfer of hemp-derived products across state lines for commercial use and other purposes. It also puts no restrictions on the sale, transport, or possession of hemp-derived products, so long as those items are produced in a manner consistent with the law.* Now that hemp will be descheduled, along with hemp derived CBD, hopefully insurance for these products will be more widely available and competitive. There is hope that states will offer state sponsored crop insurance for hemp growers.

Another big trend we are seeing is the need for companies to raise capital for future growth. Many cannabis companies are looking towards the Canadian stock exchanges such as the TSX, VSE and CSE to raise funding. When companies engage in selling shares of stock to the public, there is a greater need for Directors and Officers Liability insurance (D&O). A Directors and Officers Insurance policy protects you as a director or officer of the company if your actions negatively affect the company’s profitability or if the company is sued because of your actions. The policy will pay for legal damages and fees. D&O helps preserve the company’s cash flow against expensive legal bills. These sorts of risks will become even more apparent as the number of cannabis stocks continue to grow and the amount of active investors and traders diligently following these companies hope to capitalize on the market by challenging management and business development goals.

We continue to follow various insurance claims affecting the cannabis Industry. We are seeing claims in the product sector, D&O claims from shareholders, employment dismissal issues and crop/property claims due to the fires on the west coast. California’s gray market persisted for 20 years, but over the summer it became mandatory that any cannabis product intended for commercial sale undergo product safety testing by state certified labs. A Sacramento testing facility that had serviced the industry for years was just suspended for failing to test for 22 pesticides. The cannabis was distributed to California consumers and the recall will cost many companies in legal fees, fines and potentially their licenses while the state courts figure out who is at fault for the lost revenues. Stories like this will hopefully start to weed out the bad actors in the industry.

We highly recommend that management review their insurance policies, policy limits and deductibles every six month to make sure that as your business grows, you are maintaining adequate coverages. Many things change in the course of a year, it is important to constantly manage your risk assessments. S2S Insurance Specialists are dedicated to helping you insure, from seed to sale, all your cannabis, CBD and hemp insurance needs.

Reach out Eric Rahn and David Rahn to find the cannabis insurance policies that are most suitable for your company.

*https://www.brookings.edu/blog/fixgov/2018/12/14/the-farm-bill-hemp-and-cbd-explainer/