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A Specialty/Captive Insurance Hybrid Can Address Hemp Coverage Issues

Hemp Farm with Blue Sky and Clouds in Background
April 01, 2020

By Jeremy Colombik, CPA
Emerald Risk Solutions
and Jeff Kleid
Elite Risk

Very few people have a clear understanding of exactly what hemp is or does. Compare its seemingly ubiquitous benefits with how the character in the movie My Big Fat Greek Wedding sprays Windex on everything as a solution to all ailments. Interestingly, hemp has that reputed effect as well.

Since becoming part of the legal landscape across the country with the signing of the 2018 Farm Bill, hemp has been fast-tracked to become a unique commodity. As it is from the cannabis plant, hemp-derived cannabidiol (CBD) has become all the rage. You can't enter a room, have a phone call, or listen to the radio without hearing a miracle claim of its benefits. At the same time, hemp is also considered a very strong fiber and has approximately 50,000 uses in everything from simple clothing alternatives to Hempcrete, bioplastics, and flooring. Since there are literally millions of acres of land in the United States that are perfect for either hemp CBD, other cannabinoids, or fiber, it is truly a new economy all to itself.

That brings us to the question: How does it tie into specialty insurance or captive insurance? The short answer is that with all those uses, and especially on the cannabinoid or CBD side, there are plenty of insurable issues that can happen along the way for which coverage may or may not be available to all on the open market. Although hemp is part of the cannabis family, it is federally legal—unlike its marijuana-based counterpart—but it is also not regulated like its counterpart. So, this has caused multiple struggles to insure this side of the plant.

For instance, those of us on the front lines working with clients in the hemp and cannabis space understand the exposures from seed to sale, but the few insurance companies that are currently in the space are limited in the dollar amounts of protection and type of coverage they can offer, and, most importantly, they didn't actually develop guidelines for the hemp space, because they were so focused on the Tetrahydrocannabinol (THC) side of the cannabis plant.

Besides the limitations, one of the biggest things that makes the hybrid between traditional specialty insurance placement and a captive easier is that the rates in the various directions of coverage are so high. This is because the industry has not found a true bottom or top to its pricing. Starting at the seeds, the prices between seeds can be 1,000 percent different, based on the type, strain, capabilities, etc. At the same time, someone might have a contract to produce biomass, distillate, or isolate out of hemp, and a regulatory statute could and has been set to limit what the end user does with the product he or she already bought.

There was, and is, a need for investors, farmers, and others seeking to get into the hemp space and a need to protect their investment. An insurance policy can accomplish that. Originally, farmers were seeking crop insurance through the federal crop insurance program, which is available but very limited. First and foremost, the coverage was only available to be purchased for a limited time before the upcoming 2020 season gets started. Beyond that, coverage has only been offered in specific states, and the farmer had to have already grown hemp for at least a year. That in itself is a challenge because most farmers didn't jump right in last year once hemp became legal but rather did their due diligence and planned for this season.

The ones that were able to obtain coverage quickly learned that the amount of coverage was quite limited and, in most cases, doesn't even cover the cost to plant and harvest the hemp. While it was a good try, hemp is going to be a "different animal" to insure for quite some time, probably at least a few seasons ahead. Not only is the industry still in its infancy, but there also aren't enough studies out there to truly see how this plant will disrupt both the alternative medicine space and the fiber space. That will keep pricing and coverage fluctuating, lending great credence to why the captive insurance hybrid makes sense for hemp.

It is not just about crop insurance in the hemp space. There are other insurance needs, such as a commercial legal defense or regulatory investigation, that are not readily available in the traditional market. Last year, a shipment of hemp was traveling over state lines and had all the necessary documentation and paperwork, but police arrested the drivers and confiscated their hemp crop because the police believed the drivers were transporting an illegal substance and it smelled like marijuana. A commercial legal and/or regulatory investigation policy would have offered the protection needed for this situation—coverage that could be made available in a captive.

Generally, the insured owns and controls a captive insurance company. Unlike in traditional insurance, a captive insurance client can participate in the underwriting profits. Captive insurance can cover risks for which coverages are not available from traditional insurers. And, with a captive insurance company, the policies can be more tailored to fit the business, including having fewer exclusions and gaps than are common in traditional policies.

Now, there is a strong way to combine the traditional insurance world with that of captive insurance to help clients cut their costs by taking deductibles on things like crop insurance, stock throughputs, and product liability, then filling in that deductible with a captive insurance alternative that allows for dollar-one protection. By the way, don't think the above three coverages are readily available for everyone at every time they are needed. There are quite a few people out there selling insurance products into this space who quite frankly are not doing us or the industry any favors.

There is a "buyer beware" mentality out there from agents. The goal is to give agents the tools to best explain the pros and cons of what is out there for their clients. It is all about management of expectations.

On the actual end-user side of the hemp space, just as in THC cannabis, agents should really look behind the curtain to prepare their clients for disruptions to their supply chain and urge them to be careful and vigilant when working with a fulfillment company, purchasing biomass, and transferring ownership of their products. It sounds simple enough, but realize that none of this supposed infrastructure, knowledge, and, quite frankly, most of these companies previously existed.

As the years pass and the hemp industry becomes more seasoned, it will bring more clarity on regulation, insurance, and other factors. During this time, it is important to have the knowledge from agents to get the right protection in place to protect the hemp investment. A true hybrid policy combining traditional and captive insurance is the solution.

Jeremy Colombik, CPA, is president of Emerald Risk Solutions (ERS) as well as managing partner of Management Services International (MSI), which currently manages over 100 businesses that are utilizing a captive insurance structure. He formed Emerald Risk Solutions in 2018 to be at the forefront of the emerging hemp industry. Through ERS, captive insurance is available "from seed to sale" for hemp growers and covers crop losses, regulatory investigation, drone, stock throughput, and inland transit, as well as other risks.

Jeff Kleid is an insurance broker and founder of Elite Risk Insurance. He launched Elite Risk in 2008 to continue raising the standard of insurance coverage provided to the sports, fitness, entertainment, and technology industries. In 2018, Mr. Kleid and his team found that climate, entertainment, and technology lined up perfectly with the emerging cannabis and hemp community. He has developed and implemented multiple insurance products including the first of its kind, truly bespoke hemp crop insurance solution.

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