Cannabis Insurance Pricing & Market Update
Q1 2023
Efforts to legalize recreational cannabis continued their slow but steady progress across the U.S. in 2022 with approvals in three more states. Maryland and Missouri adopted legalization through statewide ballots, and legislation was approved and signed in Rhode Island. Currently, recreational cannabis use is legal in 21 states and the District of Columbia. Observers hold out hope that major markets like Minnesota, North Carolina and Ohio will join the mix in 2023 given that federal legalization seems further out of reach in the 118th Congress, in spite of evidence that this is a “purple” issue.
But this is just the backdrop for a bigger story as flower prices have plummeted. An extensive illicit market is one factor. Within the $72 billion U.S. cannabis industry, an estimated $47 billion takes place on the gray or black market (including cross-border sales and diverted in-state medical marijuana),1 putting licensed and tax-paying growers and retailers at a major price disadvantage.
Over-supply from in-state, licensed farms is very evident as well, due to large-scale farming and technology applications. Cannabis production in the 15 states that allow farming grew by 24% in 2022 compared to the prior year, an increase of 554 metric tons to a total of 2,834 metric tons. Oversupply was especially evident in the West. Predictably, total crop values nationwide dropped by $1 billion.2
Retail price has fallen by 75% in the past 2 years
These supply forces were magnified in Michigan. An industry-funded study found that only 30% of the cannabis sold there came through licensed channels. Much of that volume came through the state’s medical caregiver system and even more came from out-of-state – Oregon, California, and Oklahoma were identified as primary sources. Still, growers in Michigan are producing three-times more product than is sold there. The retail price has fallen by 75% in the past two years to less than $100 per ounce.3
The declining price of the flower due to these supply forces nationwide, is leading to significant financial pressure for growers in another important way. Due to Internal Revenue Code Section 280E, Cost of Goods is the only significant tax deduction available to growers, a deduction that is rapidly losing its value. Congressional efforts to address 280E will continue in 2023, but it will be an uphill fight.
Consolidation will continue to be a common survival strategy at all levels of the industry. M&A activity involving multi-state operators will continue in 2023.4 The consolidation will also be spurred by more modest industry revenue growth forecasts of 14.6% over the next five years compared to average rates that were twice that high in the previous five years.5
In this environment, growers are cutting costs wherever possible – including in their insurance coverage. Many are obtaining only the minimum coverages mandated by their states or local jurisdictions (e.g., Workers’ Compensation and, in some cases, Liability) or that are otherwise contractually required (e.g., Property). These companies are doubling down on operational risk management strategies and also self-insuring in areas like Product and General Liability through co-ops, such as CLIC Risk Retention Group, Inc., which are owned and operated by cannabis licensees at all levels of the industry.
“In instances where rates have increased, the primary driver has been reinsurance pressure.”
– CannGen Insurance
Cyber insurance is now considered a critical component
Property Destruction
Investigators reported that an illegal hemp extraction laboratory was running inside a legitimate business in an industrial park, and several explosions occurred at the location.11 It took 150 firefighters and approximately one hour to put out the flames which had rapidly reduced a one-story, 50-foot-by-100-foot building to ashes in mere minutes.11
Wrongful Death Lawsuit
A Cannabis edible manufacturer was targeted in a wrongful death lawsuit filed by a family of a 28-yearold who allegedly died hours after consuming the company’s infused gummies.12 The lawsuit charged the company and several related enterprises with multiple accounts of negligence and product liability claims.12
Contaminated Marijuana
Nearly 500 ounces of potentially contaminated marijuana, including some of the flower which tested positive for a fungus that can lead to lung infections or death, was quietly returned to store shelves in Michigan.13 In turn, nearly 64,000 pounds of marijuana that were deemed potentially unsafe by the state’s Marijuana Regulatory Agency (MRA) was recalled from shelves.13
Depending on the carrier, oftentimes, once the application is signed by the insured, that becomes a warranted statement. Once the risk has been underwritten, the broker presents the terms and conditions of the insurance policy and coverage is bound. It becomes a binding contract between the operator (insured) and the insurance company (insurer). Per Michael Hennessy, IMA Financial Group’s National Cannabis Practice Leader, “We encourage our clients to not think of insurance as a transaction product, but as a way to transfer risk, i.e., an insurance policy.”
Partner with your broker early to prepare for any changes to increase greater renewal success.
It is important to work with your broker’s industry experts who understand the business and the market for placing the specific risk. Collaborating with a team that can best represent your risk and partner with your operations is more critical than ever in this disciplined market we are experiencing.
IMA has a team solely dedicated to managing cyber risks. They offer expert assistance, including coverage analysis, financial loss exposure benchmarking, contract language review, in-depth cyber threat analysis, and strategic development of comprehensive, high- value cyber insurance programs.
Our contract review teams add value to our clients’ overall risk management program by ensuring the indemnity language is market standard and doesn’t expose our clients to unforeseen losses that may not be insurable.
Alex Fullerton
Marketing Specialist
Matt Grimes
Account Executive
Michael Hennessey
National Cannabis Practice Leader
Angela Hochberger
Account Executive
Brian Leugs
Writer