Lloyd’s of London Takes Back Vote of Cannabis Confidence
On May 29, 2015, Marijuana Business Daily reported that it had viewed a memo from insurance behemoth Lloyd’s of London, wherein it directs its underwriters not to write or renew existing policies to cannabis-based companies until the plant is legal on the federal level.
Sources who have viewed it state that the internal memo contains passages like “Lloyd’s will continue to monitor developments under U.S. law and will reconsider this position if and when the conflict of laws is resolved,” as well as this summation from Lloyd’s on why the current risks outweigh the benefits in its eyes:
“Cash generated from the sale of marijuana invariably implicates federal anti-money laundering laws (these, too, are currently subject to non-enforcement policies) … . Unless and until the sale of either medicinal or recreational marijuana is formally recognized by the government as legal, as opposed to subject to non-enforcement directives, syndicates at Lloyd’s should not insure such operation in any form.”
Shock to the System
The sudden exit was a big surprise to the industry and the scores of U.S.-based brokers who marketed the Lloyd’s-backed products. While exact figures are hard to come by, we estimate that between 60-80% of the thousands of cannabis-based companies that currently have insurance have been underwritten by Lloyd’s syndicates. The surprise is two-fold: One, Lloyd’s has been around cannabis in the U.S. for over a decade now, so to leave when every key metric of acceptance is on the upswing is perplexing. Second, for Lloyd’s to say it has a hard time pricing out a risk is odd considering the structural makeup of the firm and its history.
Lloyd’s is not run like any other insurance company. In fact, it’s technically not even a company at all. It is more of a management group layered over an elaborate system of nearly 100 syndicates— member underwriters, some individuals and some companies themselves—who pony up large sums of capital to underwrite specific risks that are mutually agreed on.
This setup has a specific purpose, which is to allow capital to come together to insure things that nobody else would touch. It was Lloyd’s who insured Keith Richards’ fingers, Tina Turner’s legs, and Troy Polamalu’s hair. It is Lloyd’s who will be insuring Virgin Galactic space flights; this is the company that boasts about being able to insure against anything. So has it really been stumped by the cannabis plant?
The exit of Lloyd’s is bound to put immediate upward pressure on insurance premiums. Cannabis business owners that have coverage underwritten by Lloyd’s syndicates, which is most of them, will need to find a new alternative. They exist, but you may not find as broad or as deep a coverage blanket as was available with Lloyd’s.
The good news is that there are several other underwriters willing to take on policies to cannabis cultivators, distributors and retailers. The general liability needs these companies have are pretty much the same as a company in any other industry—the risk of inventory loss, theft, business interruption, workplace injury, etc. Some specific policy features for cannabis have included mislabeling claims and product liability, as well as crop damage.
Todd Foster of Oregon Cannabis Insurance has stated that there are five other insurers he is working with to underwrite policies for cannabis firms, one of them being Hannover Re—he has chosen to keep the other four “close to the vest.”
When Lloyd’s first entered the cannabis insurance space over a decade ago, it came up with an underwriting framework that created many of the standard operating practices companies use today, such as on-site safes for cash and product, building security and 24/7 surveillance.
Next Wave Insurance Services, operating out of San Diego, is one of the biggest cannabis program insurers in the country. Program Manager Mike Aberle made a prescient strategy move by transitioning to Hannover Re from Lloyd’s in February of this year. With Hannover underwriting, Aberle has created a very comprehensive package for the cannabis business owner, offering protection up to $10M on property, $5M on crops, cyber liability, and product liability for both medical and recreational services in all states where cannabis has legalized usage.
Wellness Medical Protection Group, operating out of Chicago, was offering coverage of up to $2M per occurrence to certain commercial marijuana growers. As of late 2014, this coverage was underwritten by Lloyd’s syndicates, the names of which were once again well-guarded.
Hannover Re of Germany looks to take up the baton left behind by Lloyd’s and this German insurance giant has the financial resources to pick up all the business it wants. Hannover Re is the third largest reinsurer in the world, and its push to service cannabis businesses couldn’t come at a more opportune time.
Even the insurance that was offered by Lloyd’s was somewhat prohibitive compared with the standard P&L insurance a non-cannabis company could obtain. Almost all of the insurance offered so far has been excess line coverage, which immediately puts it into a different risk class in the eyes of the actuary. It costs more for the same notional value of coverage, and the deductibles are higher.
Product liability, an area that Lloyd’s only first entered a couple years ago, may have been the part that scared it out of the field. There have been little to no precedent setting cases in the area of cannabis product liability. So how was Lloyd’s supposed to know how to price it? And if it can’t offer a turnkey suite of coverages, it would have been pragmatic for Lloyd’s to just exit the business altogether.
It may not be sexy, but insurance is vital to any business that handles property of value, whether it be a warehouse, retail storefront, manufacturing facility, or just about everything in between. We live in a world where as long as something can be insured against, somebody will undertake the venture. And as long as there are two or three suppliers of insurance, the costs shouldn’t be prohibitive to somebody opening up a new business or expanding if they want to. All of the other risks of running a business are still there of course, but at least owners don’t have to worry about a single random act destroying their life savings.
Lloyd’s exit does, however, bring us firmly back into the present by reminding us that the federal “hands off” policy is nothing more than a memo; it is not official and it is not permanent. We may have faith that the people in positions of power right now have our backs, but the playing pieces can change in a heartbeat. Lloyd’s knows that. It has been crunching strange numbers for over 300 years. On this one, Lloyd’s is risking being blackballed by an industry that could be generating revenue of $100 billion annually within a few decades. It is a big future risk for Lloyd’s, one that it should have considered.
Faced with higher costs and potentially more limited coverage than they used to have, owners and operators will have to work even harder to mitigate business risks internally through employee training, standard operating procedures and best practices. This is yet another onus put on a cannabis industry that has to spend a good portion of its existence justifying itself and fighting for basic back office services.
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