A Cannabis Insurance Captive, Really?

by | Apr 8, 2019 | Business Risk, Cannabis, Commercial, Commercial Insurance, Risk Management

Wow, things really do move fast. It has been nearly a year since we made the decision to formalize our practice in the cannabis space.  It has been fun nearly every day.  It has been a learning experience.  It has been an opportunity to meet some really talented people.  It has been a blast to collaborate and tackle some significant challenges with new forward thinking people.  I think some of my most recent conversations are worth sharing.

Last fall I attended a captive insurance meeting with a client.  At one of the nightly networking events, a gentleman approached me with a number of questions.  He was an agent from another part of the country, but had heard we were doing a lot of work with cannabis insurance.  We had a great conversation that evolved into a much larger conversation with some pretty talented consultants and captive management folks we work with.

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At that point, we started to discuss the viability of a homogenous group captive for the cannabis industry. The concept of an entity owned by a number of companies in the same industry, in this case cannabis, with similar insurance needs, leveraging their collective buying power, lead to fascinating conversation. A completely cannabis insurance captive. I left with a desire to do a little digging.

When I returned home, I started talking to people: savvy investors, tax specialists, wealth advisors, our captive consultant (who I later found out had worked a great deal on developing a potential cannabis captive), captive managers, and a really talented CPA.  There has been a great deal of interest.

My team at the office started asking questions.  “Tom, you always told us captives were a reward for clients with a track record of great loss experience and strong risk management!”  “You told us captives were risky for early stage companies!”  “You told us the actuaries cannot develop the funding and attachment points without 10 years of data!” Check. Check. Check.  I have definitely told them all of that.

So what changed? That advice was given in the context of conversations we often have about clients and prospects we work with.  Companies often look at captives as an escape from bad loss experience.  Bad idea.  Companies sometimes look at captives as a tax strategy rather than a risk management strategy.  That’s not why we work with captives.  If you like spending time with the IRS, have at it.  Companies also look at captives solely as a wealth transfer mechanism.  Again, that is not why we work with captives.

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Outside of the reward for great loss experience and strong risk management, there are other viable reasons to look at captive insurance as a risk management strategy.  When there is a lack of coverage availability or coverage limitations in an insurance marketplace, a captive solution may be an option.  When there is premium uncertainty or even uncertainty regarding if your insurance company will remain in the market, a captive solution may be an option.  If nothing else, the concept of buying performance-based insurance versus the traditional approach of buying as a victim is certainly worth talking about for many of our clients.

Coverage limitations? Insurance company uncertainty? We at least have some pretty compelling reasons to continue with the dialogue.  We will continue down this path.  We may never get anywhere, but learn a lot along the way.  We may put something together that could be really meaningful for the industry.  I’m pulling for the latter.  At this point, we have had a number of conference calls and we have a meeting scheduled this month with a lot of smart people to determine viability.

Finally, I am certainly not recommending that everyone in this space run out and try to find a cannabis insurance captive solution.  These are complex insurance programs that require a long term strategic approach to purchasing insurance, an understanding of the financial mechanisms, and upfront capital investments.  They are not a good fit for everyone.  There are good programs for cannabis companies today.  They are becoming stronger and more stable.  As with any industry, the coverage should become more robust over time as well.

That said, we are finding great options for those in the cannabis industry everyday. If you would like to discuss a strategy for your organization please give us call a call 508.824.8666. Click below to reach out through email or see the next industry event we will be attending!

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