At a time of high inflation and plunging stock values, the cannabis sector remains one of the country’s fastest-growing industries.
According to Cowen, sales topped $17.5 billion in 2020 and continue to pick up pace as more and more states move to establish legal recreational marijuana markets. By 2030, the cannabis industry analyst predicts annual US marijuana sales will hit $75 billion.
But strong growth while federal cannabis prohibition remains in force presents unique challenges for marijuana business owners. To avoid significant losses, cannabis entrepreneurs need to take into account the following risks, and seek an insurance broker with marijuana-industry expertise to mitigate against them.
1. Reliable banking and insurance services remain hard to find
Federal cannabis prohibition deters many banks and insurance providers from serving marijuana businesses, even if they operate legally at the state level.
Absent federal decriminalization, marijuana business owners anxiously await progress on legislation that will allow banks and insurers to work with cannabusinesses without the threat of federal interference.
The Secure and Fair Enforcement (SAFE) Banking Act and the Clarifying Law Around Insurance of Marijuana (CLAIM) Act would do just this but movement on Capitol Hill, especially in the Senate, remains painfully slow.
In the meantime, many smaller insurers and banks have stepped in to fill the gap, but this is unlikely to be enough long-term for an industry experiencing such rapid growth.
2. Theft and security risks
The fact that so many marijuana businesses have to operate in cash puts them at increased risk of theft and accidental losses.
City zoning laws also play a role. Some jurisdictions choose to limit the number of marijuana dispensaries in a given area, which forces some to open up shop in more dangerous parts of town.
As Kevin O’Brien, cannabis insurance broker at Marsh, puts it, many states are de facto choosing to “put this high-value commodity in the middle of a high-crime zone.”
3. Workers’ compensation issues
All employers are at risk of workers’ compensation claims. For marijuana businesses, these risks differ depending on whether the enterprise is a farm, dispensary or a processor.
At dispensaries, workplace violence arising from thefts or robberies is a concern, while cultivators face similar challenges as farmers with regards to the use of heavy machinery.
As more and more states move to allow marijuana home deliveries, cannabis retailers would be further advised to consider their commercial auto exposure, with thefts and accidents all too likely.
4. Skills shortage
Many businesses are struggling to recruit the talent they need following the pandemic. For marijuana businesses, this is perhaps even more severe given how young the industry is and how rapidly its growing.
As one insurance analyst suggests, this combination often means that “the focus on health and safety is not necessarily where it should be.”
5. Increased wildfire risks
Wildfires are increasing in frequency and intensity in many parts of the US where cannabis is grown. In California alone, around 2.6 million acres of land suffered from wildfires last year.
Under federal law, marijuana crops aren’t eligible for the federal crop insurance program since it contains more than 0.3 percent THC. This means most cultivated marijuana remains uninsured.
While this risk primarily affects cannabis cultivators, retailers also need to be aware of wildfire risks to their business premises, and the potential impact on the supply chain.
6. M&A and bankruptcy threats
Mergers and acquisitions are becoming increasingly commonplace in the marijuana sector as the industry continues to consolidate.
MJ Biz Daily reported 86 M&As in 2020, compared to 306 in 2021.
The other side of the coin is that many smaller marijuana companies are finding it increasingly hard to compete with the bigger players, who are better able to absorb the impact of high cannabis tax rates, stringent regulations, and labor demands.
As with wildfires, this is a problem since marijuana businesses cannot claim relief from US bankruptcy courts owing to the plant’s federally illegal status.
Key Takeaway
Risks and opportunities abound in the marijuana industry, but if you want to lower your chance of getting burned while following your dream of running a successful cannabis enterprise, you need to take your insurance options seriously. Get in touch with an insurance agent with marijuana-specific expertise to work out a coverage plan that suits you.
