When states declared cannabis operators essential during the pandemic, that kept cannabis dispensary doors open and boosted sales. That was fine and well, but it also had the effect of pushing up the costs of auditable policies – giving some companies an unpleasant surprise.
In the latest Insuring Cannabis Podcast, we spoke to a pair of seasoned cannabis insurance brokers about auditable policies and how the volatility in the industry made things worse for some.
Following are brief takeaways from that conversation.
Quite often cannabis operators, even the larger ones, don’t have a traditional risk manager role, instead often relying on chief financial officers or legal counsel, who either aren’t too familiar with insurance or aren’t familiar with cannabis.
The green rush brought over numerous executives from industries far and wide, so often brokers are dealing with buyers who are new to the industry.
Norman Ives, the cannabis practice leader for Worldwide Facilities, is a wholesale broker who has been dealing with cannabis companies of all sizes for over a decade.
Ives has been spending a lot of time educating buyers and helping his retail agent clients educate buyers about the industry – and about complex insurance matters like auditable policies, and dealing with the surplus lines industry.
“And when you get people that are coming from traditional avenues of business, into the cannabis sector, there is a whole learning curve that they have to go through, not just on the financial side of the house, because they’re not going to traditional means for funding, but also on the insurance side of the house, because we’re dealing with E&S insurance markets that they may not be familiar with and the limitations of the insurance that’s available out there,” Ives said.
Explaining auditable policies has been something that Ives has been doing a lot of lately following the COVID-19 outbreak. With cannabis businesses declared essential in numerous states, product continued moving out the doors – and at a high rate.
Global cannabis sales rose in 2020 to $21.3 billion, according to a report out from analytics firm BDSA in March. The 2020 figure was an increase of 48% over 2019 sales of $14.4 billion.
“COVID had an impact on the cannabis industry, cannabis operators, by and large, across the majority of the states were deemed essential operations,” Ives said. “Many of them saw increases in sales over what they were anticipating originally because of the environment created during the lockdowns and COVID. And so we’re having these conversations with brokers, brokers are having those conversations with the CFOs and general counsel and the insured on almost a daily basis, because if you’re exceeding your forecast, the carrier is going to be coming back, asking for additional premium for the sales that they covered.”
Ives had one client whose sales were $35 million over their initial forecast, costing them roughly $122,000 at the end of the policy period.
He’d prepared the client for what was coming, but not all brokers have been doing that so well.
TJ Frost is president of Symphony Grow, the specialty business of Symphony Risk Solutions focused on the risk management and human capital needs of the legal cannabis, hemp, and CBD industries.
Frost said he’s been having regular meetings with his cannabis clients throughout the year to prepare them for the big bills headed their way. Sales for one of his clients came in at $50 million over initial estimates.
“We were pre negotiating rates,” Frost said. “And then we were talking about biweekly phone calls with our clients to prepare them for audits, because we knew that they were going to get hit other than the year, but we need to prepare them to start setting money aside.”
Frost has been hearing regularly about the pain being felt by insurance buyers whose brokers didn’t alert them to the coming bad experience.
“So then you have to write a check for say a hundred thousand dollars that you weren’t expecting at the end of the year,” Frost said. “And that’s been causing a big stink with a lot of other customers and a lot of clients, which we’re getting phone calls on because that rubs them the wrong way.”
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