With the legal cannabis market growing fast throughout the United States, retail insurance agents are becoming more educated on the various exposures cannabis clients present.
The cannabis insurance market is currently split between a few traditional E&S carriers and managing general agents that are using fronting paper from carriers with an AM Best rating of A-VII, meaning they have adjusted policyholder surplus of $50-100 million.
For the average insurance agent, most policies that they sell are on admitted paper, which means that there will typically be a guarantee fund, so that if an insurance company becomes insolvent, the state would be able to step in and provide at least a nominal amount of insurance recovery until that fund is depleted.
“With E&S lines, you’re not part of an admitted program, so if those carriers go out of business, you have to replace that coverage right away,” Ives explained.
Product liability has a retroactive date, and it builds up over time as an insured maintains the continuity of their coverage.
Despite coming with a higher degree of risk, the MGAs and MGUs using A-VII fronting paper are “relevant players” in the cannabis insurance market, according to Ives, because they’re filling a problematic capacity gap, especially when it comes to property insurance.
There are some traditional carrier markets with strong financial ratings participating in the space – including an A-XV carrier, an A-XIII carrier, and an A-IX carrier – all of whom are offering claims-made liability coverage that includes a duty to defend, but they’re not offering enough capacity to cater to all of the cannabis market’s insurance needs.
“Agents need to carry out a risk assessment to consider where it makes sense to use MGAs and MGUs with A-VII fronting paper and where it makes sent to use a more traditional carrier,” Ives told Insurance Business.
Frankly, you’ll struggle to fill out a $40 or $50 million property schedule for an operator if you don’t include the MGA markets just based on what’s going on in the property market.
At this time, cannabis is still considered a Schedule I drug under the federal Controlled Substances Act of 1970, so many carriers and agents have been reluctant to engage in and educate themselves around cannabis insurance.
If federal legalization goes ahead, Ives expects to see more traditional carriers stepping into the market, but he predicts they’ll be “somewhat selective” in where and how they participate, based on their company’s history, their risk tolerance and preferences.