What AM Best Says
AM Best: Cannabis Insurance Market Poised for Growth
The federal illegal status of cannabis has limited many carriers from coming to the market and opening it up.
- John Weber
- August 2021
Two-thirds of U.S. states have legalized cannabis in some form, opening up many opportunities for insurers, said David Blades, associate director, and Christopher Graham, senior industry research analyst, AM Best.
Best's Special Report: Cannabis Market Growth Expected but Federal Laws Remain a Roadblock discusses how federal legislation could remove major obstacles that have left large insurers on the outside of this nascent market. Following is an edited transcript of the interview.
What's the main conflict here between federal laws and state-level legalization efforts?
Blades: Well, with more than two-thirds of the states across the U.S. having legalized cannabis for either recreational or medicinal use, it's still a Schedule 1 Drug, meaning that it's illegal under federal law. That dichotomy basically puts governance of cannabis on a state-by-state basis. The states are developing their own guidelines for the governance of cannabis from their own individual standpoints. From that perspective, you create a very fractured market.
In addition, what the illegal status from a federal standpoint also creates—when you're talking about interstate commerce—is that the importing and exporting of cannabis products from one state to another is also illegal, even when you're dealing with two states where it's legalized to some capacity in those states.
Again, it's the federal status, the Schedule 1 Drug status, that's really limiting the potential and the openness for the market overall. That's limiting the capacity for insurance carriers to come to the plate with the insurance products they want to generate for the overall marketplace.
In terms of legislation looking at legalizing cannabis, there hasn't been any law that's gotten momentum in terms of both houses of Congress. There is the Safe Banking Act of 2021 that has passed the House, but again, it hasn't gained momentum in the Senate yet.
We haven't yet seen both houses of Congress come together and get a strong push behind a federal legalization bill that can really get us to the precipice of seeing cannabis being legalized.
That is what is limiting the market and limiting the interaction that some insurance carriers would like to be able to come into the marketplace with and take advantage of a multibillion-dollar industry.
That's what we're waiting for and what would be the game changer—federal legislation that does actually gain momentum and passes both houses of Congress would be the game changer for this marketplace. Right now, there are many that consider the cannabis industry a multibillion-dollar industry that doesn't have a true risk management solution that has been established and put in place for that industry.
Who's been the main provider of coverage?
Graham: So far, it's been largely surplus lines carriers. There have been a few captive insurers popping up, and we've seen a limited number of admitted carriers limited to the state of California.
What's the growth potential for the cannabis industry, and the prospects for insurers?
Graham: Projections are showing this to be around $40 billion a year by the middle of the decade. There's a whole supply chain involved. That's growing the product, distributing it, insuring it on premises. Every aspect of insurance would somehow be involved here. Look at a state like New Jersey, where you're allowed to keep six plants on your personal property. Does that open up the possibility for homeowners coverage to include cannabis? A lot of opportunity.