With an adverse regulatory environment, labor shortages, supply-chain disruptions, and the ever-present threat of property damage and product recalls, cannabis operators continue to fight an uphill battle.
Meanwhile, rising inflation and higher costs for fertilizer, building materials, packaging, and more are hurting the industry’s bottom line, but companies hesitate to raise prices in an ultra-competitive market.
High taxes and barriers to interstate commerce continue to challenge the industry, with more than twenty of the largest publicly traded cannabis companies losing about $550 million on revenues of nearly $4.5 billion in the first half of 2022.
Although merger-and-acquisition deal volume declined in 2022 compared with 2021, more private-equity and venture-capital firms are investing in the industry. However, lenders and investors are demanding more detailed proof of future profitability, meaning those pursuing new capital must show how they will grow financially and present their risk-management strategy for insuring themselves against losses.
Despite all these headwinds, the industry’s rapid growth, myriad opportunities for product development, and increased access to insurance capacity offer multiple reasons for optimism in 2023.
New products bring new risks
The swiftly expanding industry is introducing new products to the market at a breakneck pace. Although this brings opportunity, it also presents new challenges.
Cannabis companies filed more claims against their product liability policies in the first six months of 2022 than in the past five years. Recalls and litigation also are impacting product liability coverage, where rates are expected to rise 10–15 percent in 2023.
New products such as cannabis-infused beverages, sugar-free tarts, and cannabinoid-containing baking staples like coconut oil and brown sugar require additional research and development for extraction, packaging, storage, and distribution. Many products require refrigeration and bottling, adding greater complexity to distribution.
The continued growth of the edibles and beverages market also is driving companies to create new formulas, products, and strengths. The THC beverages market alone is projected to grow more than 15 percent year over year between now and 2025.
That said, this innovation does add risk. States issued dozens of recalls in 2022 for marijuana edibles, including mislabeling and mold and salmonella contamination. These incidents attracted the attention of plaintiffs’ attorneys, who filed suits on behalf of consumers claiming injury from the mislabeled or contaminated products.
Companies with solid risk-management plans and advisors to ensure their insurance policies cover the many exposures will be well positioned to grow and succeed in 2023.
Invest in people
High turnover and a skilled labor shortage are testing cannabis companies, forcing operators to spend additional time and money to attract and retain employees. It’s a challenge that will only grow as the industry expands. The number of jobs in the industry grew 33 percent between 2021 and 2022, and the need for new workers shows no signs of slowing.
Low wages, few benefits, industry stigma, and the physical labor required for jobs on the cultivation side have compounded the labor issue. Given state-government scrutiny and industry compliance requirements, companies must train for both job-related skills and government regulations. Investing in training and onboarding will improve safety and employee loyalty.
Personalized benefits programs offer a partial answer. Personalizing benefits to meet individual employee needs results in positive employee experiences, helping build a workplace that attracts and retains workers. Many companies are adding health insurance and offering 401(k) plans, raising wages, and adopting other worker-friendly practices to attract and retain talent.
Manage casualty losses
The components and systems required to cultivate plants, including high-intensity discharge lighting, chemical exposures, and butane in oil extractions, present hazards.
The National Fire Protection Association has issued standards to prevent products from going up in flames. Underwriters are inspecting production equipment and fire-suppression systems closely as a condition of insuring a property.
For growers located near hurricane or wildfire zones, the risk is even higher. Property policies typically don’t cover cultivators’ hoop houses and other outbuildings, and more carriers are limiting or excluding coverage for losses from large-scale natural disasters.
Coverage for crop losses from catastrophic events is limited and often prohibitively expensive for cannabis crops. Even if a cultivator’s buildings and plants survive a nearby wildfire, contamination from dust, smoke, ash, and fire retardants can ruin a crop.
In response, companies are scrutinizing policies to make sure they’re aware of any gaps in coverage so they can plan for how to address them.
Cyberattacks remain a significant loss-driver in the industry, and cyber insurance uptake among cannabis companies is up. Rates have begun to ease, particularly for companies with advanced cybersecurity controls and training.
How to weather the storm
Cannabis companies should enter 2023 with a tailored strategy to protect their bottom line, support their workforces, and build resiliency. Here are some initial considerations.
Offer additional benefits. Take benefits programs to the next level with highly personalized options that attract employees and don’t break the budget.
Build company resiliency. With more carriers offering specialty coverage for the industry, now is the time to consider (or reconsider) how best to protect executives and build resiliency by insuring against directors’ and officers’ liability claims, business interruptions, and cyberattacks.
Prepare for product recalls. With nearly all cannabis companies experiencing at least one product recall over their lifetime, the time is now to plan how to respond. Be thoughtful about general and product liability coverage and understand the differences in coverage.
Be transparent with brokers. Review exposures and insurance needs and communicate business changes to brokers at least ninety days prior to policy renewal in order to identify the best options early.
Jay Virdi
