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How Federal and State Hurdles Are Impacting the Cannabis Industry

Many cannabis businesses deal entirely in cash, which makes it hard to operate while under significant risk from theft.
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how federal and state hurdles are impacting the cannabis industry

As of February 2023, recreational cannabis is legal in 19 states and Washington, D.C. With an estimated market value of $33 billion, the market is expected to grow to $58 billion by 2030, according to The Center for Advancing Health (CFAH). However, some are pointing to lackluster retail sales in 2022 as being indicative of a market that is not taking off as anticipated.

Cannabis is currently the most commonly used federally illegal drug in the U.S., with 48.2 million people, or about 18% of Americans, said to have used it at least once in 2019, according to the CDC. However, when the U.S. Senate scrapped the “Secure and Fair Enforcement (SAFE) Banking Act" in December 2022 and cannabis sales have been dragging since 2021, it appears that the industry may be facing some growing pains.

The most significant challenge to the industry continues to be the lack of access to the federally insured banking system. While many in the industry have been able to find access to nontraditional banks, many others continue to deal entirely in cash, making it hard to operate a business without significant risks from theft.

“Although various government officials vowed to reintroduce the bill this year, most are looking beyond the 2024 elections for true passage," says Jason Scheurle, national product leader, cannabis, Burns & Wilcox.

Further, what is evident in the market is that “when there is a poor attempt to push through the Safe Banking Act, it continues to make it difficult for real progress to be made and for continued investments to be deployed," says Tony McIntosh, president of Aura Risk Management & Insurance Services and executive vice president and partner of The Liberty Company Insurance Brokers.

In retrospect, “2022 was a more difficult year for cannabis compared to years past," Scheurle says, pointing to “inflation challenges that have made significant impacts on the market in the form of layoffs and overproduction of products."

“Due to factors like these, many cannabis companies were forced to adjust their operations and revenue projections, which is foreign territory to many organizations that enjoyed tremendous growth previously," he adds.

Additionally, from the insurance carrier perspective, “there's a lack of coverage creativity from the overall marketplace due to the continued lack of federal legalization and overall unknowns," says Patrick McManamon, founder and cannabis program practice leader, Cannasure Insurance Services LLC.

“Cannabis coverage offerings are vanilla due to the concerns of potential future claims, such as product liability—including labeling mix-ups and high THC concentrations—vandalism and theft, heightened wildfire concerns, and the significant spike in large fire losses due to high-pressure sodium and metal halide bulbs," McManamon says.

On the positive side, more states are continuing to legalize cannabis and this trend may continue through 2023, allowing cannabis companies to scale their operations nationwide, according to The Motley Fool, an investment guidance firm.

“For example, New Mexico opened recreational dispensaries in April 2022 and finished the year with more than $214 million in recreational sales, with a record $28 million in December alone," says Joe Dahlvig, cannabis product expert and senior casualty underwriter, Admiral Insurance Group, a Berkley Company. “Also, New York just opened their first recreational dispensary, in a state expected to become a multibillion-dollar market."

Yet, “state-by-state irregularities make it tough on multi-state operators (MSOs)," McIntosh says. “Some states are tighter than others on permits, so oversupply becomes a real issue for these companies."

Nevertheless, McIntosh makes two predictions. “In the managing general agent (MGA) space, we'll see some capacity reductions with some providers and expansion with other well-performing MGAs," he says. “We will likely see some expansion of policy language to favor insureds more as historical data continues to show positive trends."

Meanwhile, renewal rates continue to remain flat as carriers “recognize better than expected loss ratios and a need to be competitive to keep renewals," McManamon says. “As the cannabis insurance marketplace seeks to earn new business opportunities, some markets are getting more price competitive to help grow their book of business."

“There have been a couple of new smaller market entrants, mostly seeking one to two location dispensary accounts, so that segment of the industry is getting more competitive due to more competitors," McManamon says.

While the continued increase in new legal markets is set to help the cannabis industry expand, and thus, the cannabis insurance market to expand, for now analysts are making revisions downward to reflect the recession risk facing the cannabis sector, the price compression caused by the increased supply over demand, and the continued challenges facing the industry after Congress failed to pass the “Secure and Fair Enforcement (SAFE) Banking Act."

Olivia Overman is IA content editor.

Monday, May 15, 2023
Big I Markets