State of the Insurance Market Report

2025 Initial Outlook and 2024 Wrap-Up

Cannabis Insurance

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The cannabis industry is experiencing rapid growth and facing unique challenges. Major business issues include navigating complex regulatory environments that vary significantly by state, managing supply chain disruptions, and addressing consumer safety and quality concerns.

Insurance-specific challenges include limited availability of specialized insurance products, high premiums, and a lack of historical data for accurate risk assessment. Additionally, clients must contend with evolving compliance requirements, which can impact both operational and insurance costs.

Market Conditions

As of mid-2024, the cannabis insurance market is experiencing a period of price hardening and increasing premium rates. This trend is characterized by increased premiums and more stringent underwriting requirements.

Factors contributing to this hardening include heightened regulatory scrutiny, the complexity of insuring cannabis operations, and a rise in claims related to product liability and property damage.

Insurers are becoming more selective, demanding comprehensive risk management plans from cannabis businesses seeking coverage. Additionally, insurers are adjusting their posture to incorporate new risks associated with emerging cannabis products and consumption methods.

Several factors influence insurance buyers in the cannabis sector, including:

  1. Regulatory Compliance: The constantly shifting regulatory landscape creates uncertainty and potential liabilities, prompting businesses to seek more comprehensive insurance solutions.
  2. Inflation and Business Costs: Rising operational costs, including wages and raw materials, are impacting profit margins and increasing the financial risks for cannabis companies.
  3. Rising Claims Costs: The industry is witnessing an uptick in claims, particularly in product liability, due to incidents related to product contamination and consumer health impacts.
  4. Market Consolidation: As the industry matures, consolidation among cannabis companies is creating larger entities with more complex insurance needs, driving demand for customized insurance solutions.

Coverage Considerations

The hardening trend in the cannabis insurance market will likely persist through the end of 2024 and into early 2025. This projection is based on ongoing regulatory developments, the evolving nature of cannabis products, and the need for insurers to adapt their risk assessment models. However, as insurers gain more data and experience in this sector, we anticipate a gradual stabilization of premiums and underwriting practices in the latter half of 2025.

The potential reclassification of cannabis from a Schedule I to a Schedule III substance under federal law could positively impact the insurance market. This change would align federal regulations more closely with state laws, potentially reducing legal uncertainties and enhancing access to banking services. Such a shift could lower operational risks for cannabis businesses, making them more attractive to insurers and leading to more competitive insurance offerings.

The directors and officers (D&O) insurance market for cannabis businesses is likely to see modest increases in premiums, shifting from last year's forecast of a potential decrease. The following factors drive this change:

  • Regulatory Complexity: As cannabis businesses expand, they face increased scrutiny from both federal and state regulators. This complexity raises potential liabilities for directors and officers, making insurers cautious.
  • Litigation Risks: There has been an increase in shareholder lawsuits and regulatory investigations, particularly as the industry matures and companies go public. This elevates the risk profile for D&O insurance.
  • Market Growth: Despite regulatory challenges, the cannabis industry continues to grow, attracting more investment and leading to more demand for experienced directors and officers. This demand could stabilize rate increases, but pressures remain from emerging risks.

Insurance rates for other cannabis-related lines are expected to increase more significantly than previously projected. Key factors contributing to this forecast include:

  • Product Liability Claims: A report from the Cannabis Insurance Association highlights a 15% increase in product liability claims, primarily due to contamination and labeling issues, prompting insurers to adjust premiums accordingly.
  • Property and Theft Risks: There has been a 12% rise in property claims, as cannabis facilities face increased risks of fire and theft, influencing rate adjustments in property and casualty insurance lines.
  • Regulatory Developments: The evolving regulatory landscape and the potential rescheduling of cannabis at the federal level create both opportunities and uncertainties, influencing how insurers price risk across various lines.
  • Operational Costs and Inflation: Rising costs, including inflation and increased wages, are putting pressure on cannabis businesses, translating into higher claims costs and influencing rate hikes.
Cannabis Rate Forecast
Directors & Officers Insurance:   Flat to +5%
All Other Lines: +10% to +20%

Recommendations

To navigate current market conditions, we recommend the following strategies:

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Enhanced Risk Management
Invest in comprehensive risk management and compliance programs to mitigate potential liabilities and improve your attractiveness to insurers.

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Diversify Insurance Coverage
Explore a range of insurance products to cover various risks, including product liability, property, and cyber risks, to ensure comprehensive protection.

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Leverage Industry Expertise
Partner with insurance providers and brokers specializing in cannabis to access tailored solutions and insights into best practices.

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Monitor Regulatory Changes
Stay informed about regulatory developments and adjust your operations and insurance coverage accordingly to remain compliant and minimize risks.

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The cannabis industry faces unique risks and uncertainties. Risk Strategies is a specialist with the expertise, market access, and focused approach you need to ensure your business stays on track for success.

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The contents of this report are for general informational purposes only and Risk Strategies Company makes no representation or warranty of any kind, express or implied, regarding the accuracy or completeness of any information contained herein. Any recommendations contained herein are intended to provide insight based on currently available information for consideration and should be vetted against applicable legal and business needs before application to a specific client.