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The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance

The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance

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The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance explores the challenges presented by today's business and economic upheaval, as well as the hardening insurance market, and what it means for the captive insurance industry.

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Amye King—Captive Insurance Person of Interest

Amye King1
June 15, 2018

We sat down recently with Amye King, national sales director for Emerald Risk Solutions, a first-of-its-kind captive insurance company created to offer insurance coverages to state legal cannabis businesses. 

Obviously, captive insurers are being used to provide coverages for more risks than ever before. How did you identify the need for a captive for cannabis?

Captives, in general, are flexible and can be tailored to fit a business' unique risks and exposures. The cannabis industry is no different, and in fact, cannabis businesses tend to operate with high levels of risk and unique circumstances, which a captive solution is well suited to serve. The phrase "grow your own" is a longstanding tradition in the cannabis culture, likewise funding "your own" insurance through a captive often makes good business sense.

The cannabis industry includes both marijuana and hemp, which both come from the same plant—Cannabis sativa. This industry has been underserved by the commercial insurance market since Lloyd's of London abruptly ceased insuring cannabis risks due to the conflict between US federal and state laws. These businesses simply can't get coverage, and if they do, it's extremely expensive, and there is no guarantee claims will get paid. Cultivating cannabis within a legalized state for medical, recreational, or any purpose still violates federal law.

As of June 2018, cannabis is medically legal in over half the United States with more states on the horizon. Most states that allow medical marijuana permit limited use of medical marijuana under certain circumstances. Some medical marijuana laws are broader than others and vary from state to state, with specific medical condition requirements governing treatment qualification. For example, Louisiana, West Virginia, and a few other states only allow for cannabis-infused products, such as oils or pills. Other states have passed narrow laws allowing residents to possess cannabis only if they suffer from select rare medical illnesses like cancer.

Financial revenues from December 2017 showed consumer spending on legal cannabis in North America outpaced previous estimates, and retail cannabis sales are projected to grow 33 percent from 2016 to nearly $10 billion in 2018. By 2021 experts project the legal cannabis market to reach a sales high of $24.5 billion.

Regardless of success, these businesses all operate with a very high level of risk. States and municipalities require legal cannabis businesses to have some coverages such as general liability and product liability in order to operate (this varies state by state). While some commercial insurers are working with cannabis businesses, commercial insurance policies can be inadequate, expensive, or completely unavailable.

During 2017's September hurricanes, cannabis operations in Florida and Puerto Rico were devastated, and a month later, wildfires devastated Northern California, a prime cannabis growing region. Many farmers in Northern California not only lost their crops, but also their homes and the cash stored inside.

In many cases, cannabis business owners spent tens of thousands of dollars to become compliant with California state law to grow the plant, but most of the marijuana businesses affected by the wildfires were without access to insurance and had no ability to get a loan to rebuild. A charitable fund was set up to help marijuana farmers last fall, but it was frozen because a payment processor would not continue to handle the transactions on behalf of the farmers. Cannabis businesses are also not eligible for any type of disaster relief with the Federal Emergency Management Agency.

At that point, the Emerald Risk Solutions team knew it needed to bring a captive solution to this industry.

Are you finding that the cannabis industry is like other industries, or is it far more complex than you originally thought?

The industry is far bigger than it seems on the surface. The life of the product is complex and scales beyond simply who is growing and selling cannabis. There are various and many cannabis business segments such as cultivators—aka growers who grow indoor, outdoor, and with a greenhouse (warehouse or in a storage facility.) There are also ancillary cannabis businesses: hydroponic stores, testing labs, and device (e.g., e-cigarettes or vaporizers) manufacturers.

Distributors are the transporters who handle the delivery of the product and cargo (cash included), so they have massive security (armored trucks/guards.) Real estate exposures also exist for properties leased to cannabis operations. Potentially, landlords may not be fully aware that they are leasing space to a cultivator, dispensary, or infused product manufacturer, and upon discovering the cannabis facility, to avoid exposure, insurance companies will send a 30-day insurance policy cancellation notice terminating the landlord's coverage. Cannabis-infused product manufacturers create cannabis-infused products and oils, waxes, and tinctures that are becoming increasingly mainstream, leading to a marked increase in competitive threats.

Emerald Risk Solutions is also working with physicians that recommend medical marijuana to their patients, as most medical professional liability insurance policies exclude or do not cover physicians for non-Food and Drug Administration approved procedures, therapies, or medications. We also collaborate with lawyers, consultants, and investors who are working to assist this high-risk industry.

What I think is most interesting is the other side of cannabis, which is industrial hemp. As of 2017, 38 states and Puerto Rico have considered legislation related to industrial hemp, and many states have already given out permits for industrial hemp research or pilot programs.

Hemp and marijuana products both come from the cannabis plant, and hemp is typically distinguished by its lower concentration of tetrahydrocannabinol. However, a hemp plant looks like a marijuana plant, and it is also subject to the Controlled Substance Act, making it truly guilty by association. Hemp farmers are also unable to obtain adequate insurance protection, so through Emerald Risk Solutions, I am working with several growers as well as others, such as processors, to secure coverage for their hemp operations.

How has the reception to the captive been within the cannabis industry and within the regulatory community?

The captive solution response has been insanely great! There are currently commercial insurers that offer insurance protection specific to the cannabis industry nationwide, but as far as we know, we are the first captive insurance firm to offer cannabis coverage utilizing captive insurance. We attended the MJBiz Show: NEXT in New Orleans a few weeks ago, and a line of people formed waiting to speak with me about this captive solution. Attendees wanted to know more!

Emerald Risk Solutions researched and knew that outdoor crop and stock throughput were not available on the commercial side, so we positioned ourselves to address these coverages specifically, and cultivators and distributors are excited to have knowledge about how they can be protected.

We also learned that not all "stock" is covered, meaning that the policy may say "stock" is covered. Does this mean a fully grown plant, a seedling, or a harvested plant? Cannabis growers do not necessarily know they need to carefully define "stock" for their insurer.

We make sure business owners know this is a seed-to-sale coverage encompassing seeds, seedlings, cloned plants, and up to fully grown plants, as well as harvested and dried plants, and including everything between extraction to processing to truck to store. You grow it, we cover it (potentially), since captive insurance is tailored to each business owner's unique risks and exposures.

The regulatory community is receptive to captive insurance and understands we have the authorization to issue property and casualty policies to legal cannabis business owners located in the various states with laws (and regulations) legalizing cannabis. If a business is operating without state authority and without the proper license, we would not be allowed to offer such a business cannabis insurance through the captive. Our Department of Insurance specifically allows us to work only with those who are in a legalized state.

What products are you currently offering through Emerald Risk Solutions?

Outdoor crop, commercial property specified peril or "all risks" reimbursement, product recall reimbursement expense, commercial legal defense reimbursement costs, business interruption (business interruption extension: increased costs of working or cyber-liability reimbursement), administrative or regulatory actions defense reimbursement costs, drone—aerial insurance, environmental impairment liability reimbursement, crime and employee dishonesty defense legal expense reimbursement, regulatory investigation legal expense reimbursement, regulatory changes expense reimbursement, and stock throughput.

Obviously, the legalized cannabis industry is continuing to grow in the United States. What are the growth plans for Emerald Risk Solutions, both in terms of products offered and markets served?

As we grow and scale, and more products and ancillary businesses are being developed from the cannabis plant, we will add more coverages and continue to work with anyone who can potentially benefit from a captive solution. For example, cannabis delivery is truly a "drive at your own risk" operation. In the future, we are looking to find tailored solutions for cannabis delivery drivers.

Switching gears somewhat, we've talked before about the need to attract new talent into the captive insurance industry. Do you think entities such as Emerald Risk Solutions and the Space X captive will make this profession more enticing to new college graduates?

It takes real effort to reach out to college students in any industry—we hope to educate new talent about the risk management benefits of using a captive through social media platforms such as Instagram and Twitter, plus we are working through a university to set up an internship opportunity for the fall of 2018.

Anything else you would care to share with our readers?

Well, it's not all high times to work with this industry, and there are certainly some challenges we have had to work through. The money challenge is one (there is a lot of cash!) and the question over, "How can I pay my premium?" Since we are only working with states that have legal cannabis businesses operating within the state, these businesses can typically get banking services. If not, we have been able to route them over to resources that can get them set up.

I want people to understand and respect the complex nature of this well-developed and underserved industry.

Thanks for speaking with us.

Ms. King operates with one goal in mind, and that is to help others. She has over two decades of experience in formulating strategic and creative solutions for clients to reach their business goals and objections. Ms. King provides a hands-on and personalized approach to helping clients obtain specific and tailored insurance policies that mitigate their risk. She is a graduate of the  University of Illinois at Chicago, where she obtained her bachelor's degree.

Article photo of Amye King is courtesy of Emerald Risk Solutions.

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