While forty-seven states and the District of Columbia allow the use of medical marijuana and twenty-four states and the district have okayed recreational use, the United States has yet to legalize the plant — a stance the federal government has taken since the 1970s. This has made it difficult for those in the industry to obtain adequate insurance coverage at a reasonable price.
Proposed laws — such as the Clarifying Law Around Insurance of Marijuana (CLAIM), intended to increase coverage options for those in the industry and remove federal barriers for insurers doing business with those in the industry — remain at a standstill, awaiting congressional action. Additionally, U.S. Drug Enforcement Administration actions to reclassify marijuana as a less dangerous drug are pending but would not legalize social use of the substance. As a result, many in the industry are turning to alternative forms of coverage to transfer their risk.
Enter captive insurance.
What is captive insurance?
With captive insurance, the insured businesses own 100 percent of the insurance company providing coverage. Ownership offers the insured more control over their insurance programs and the costs associated with establishing coverage.
Captives are an attractive option for highly regulated industries because they are designed to allow organizations to start building an asset versus paying for insurance annually. The strategy also allows organizations to control costs and establish coverage terms based on their wants and needs, allowing them to protect their businesses better.
Two common types of captive insurance in use today are single-parent captives and group captives.
Single-parent captives have just one owner. Generally, they are used by large and more complex organizations that administer the insurance for only themselves. Group captives are formed by a group of common entities or individuals that jointly own the insurance company. Typically, group captives are appealing to midsize and large businesses and are set up to address specific types of risks for the owners. Group captives can be established by companies from a single industry or include organizations from an array of industries.
Benefits of captives
Group captives are designed to provide coverage at reduced rates and reward companies based on individual loss performance. Captive insurance premiums rely on recent individual loss data rather than traditional exposure-based formulas. Premiums fund claims for both all members in a risk-sharing pool.
This solution provides insureds greater control over risk-management costs and premiums. Group captives provide the owners control over plan documents and how they are designed, as well as access to cost-containment tools typically not available to smaller groups. Some group captives have been established to serve any cannabis-touching group, including point of sale, retail, and technology providers, which helps balance out the risk.
Group captives are an attractive option for those in the cannabis industry, because the premiums are determined and based on individual loss data. The industry also tends to employ a younger demographic, making large-level claims more manageable.
Typically, ideal candidates for a group captive must have a loss ratio score of less than 50 percent, demonstrate proactive risk management measures are being used in their facilities and by employees, and meet the established minimum premiums, which can vary but generally start around $250,000.
When compared to traditional insurance, it’s estimated that new premiums for this form of insurance are about 15–30 percent lower in the first year alone. After three or four years, insureds have the opportunity to recoup unused loss funds through dividends, leading to increased savings.
Looking ahead
Legislation and progress at the federal level move slowly. Nevertheless, the question is not whether the federal government will legalize cannabis but when full legalization will occur. Once that takes place, more insurance organizations will begin serving the industry.
Until then — and even afterward — captive insurance offers a viable option for protecting businesses.
As chief sales officer for specialty practices at global insurance brokerage Hub International, Jay Virdi connects clients with a team of experts to achieve their goals while reducing risks in a highly scrutinized industry. He is a Chartered Insurance Professional under the Insurance Institute of Canada.
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