The hemp and cannabis industry experienced a few pleasant and not-so-pleasant surprises in 2019. Regardless, its value chain—primary, including seed providers and cultivators; secondary, comprising product manufacturers; and tertiary, consisting of retailers and supporting services providers—has flourished.
Cannabis/Hemp Industry in 2019
The amount of land that U.S. farmers are licensed to grow hemp has increased much more than in 2018. Hemp’s removal from the federal Controlled Substances Act via the 2018 Farm Bill and the ease of shipping it across state borders has further aided its production. Reports show that there is also a constant capital inflow into the cannabis industry.
In August 2019, the National Credit Union Administration allowed credit unions to serve compliant hemp businesses. The Food and Drug Administration is researching the safety of hemp-derived CBD. The Environmental Protection Agency is reviewing applications for hemp crop protection tools for 2020.
Federal drug authorities updated their guidance to reiterate that hemp is no longer a controlled substance. Now, 41 U.S. states have legalized hemp agriculture, which would raise employment in the industry. The industry will need not just growers or transporters but also personnel well-versed in finance, law, science, compliance, information technology, and more.
The industry is awaiting the fate of the Secure And Fair Enforcement (SAFE) Banking Act, which would give cannabis/hemp businesses access to traditional banking services and free them from insecure cash-only operations.
For now, federal regulators have stated that banks are not required to file a Suspicious Activity Report (SAR) on customers who cultivate hemp subject to applicable laws and regulations. Although banks do not have to accept hemp accounts, such clients can be treated like customers from other legal industries.
However, in the midst of all such positive developments, many publicly traded cannabis companies registered double-digit losses in the second quarter of 2019.
Opportunities for Cannabis/Hemp Insurance in 2020
Eligibility for USDA programs: Hemp farmers will be eligible for many United States Department of Agriculture (USDA) programs, including loans, some crop insurance policies, disaster aid and conservation schemes in 2020.
The USDA’s Risk Management Agency (RMA) has announced insurance coverage for industrial hemp growers from areas covered by hemp plans with USDA approval or who participate in approved state or university research. They can obtain insurance coverage under the Whole-Farm Revenue Protection.
USDA’s Agricultural Marketing Service (AMS) is formulating regulations for producing hemp and for submitting state, territorial or tribal plans. Once this process is complete, RMA, the Farm Service Agency (FSA), and other USDA agencies will announce the eligibility criteria for their programs, such as farm loans and disaster assistance. Farmers may also be able to buy FSA’s Noninsured Crop Disaster Assistance Program policies.
Legitimacy and rights: The USDA announcement will legitimize hemp as a row crop and may also help farmers to access other rights.
Availability of hemp products: With lesser federal regulations on manufacturing and distribution, hemp products will be easily available. Total legal sales of cannabis are estimated to reach around $66.3 billion by 2025.
New insurance carriers and policies: More insurance providers will enter thecannabis/hemp insurance arena. Businesses will enjoy higher liability limits. More outdoor cannabis crops will be covered, along with workers’ compensation for businesses. If the Safe Banking Act becomes law, more such opportunities may be possible.
Hemp growers, testing labs, and other organizations with access to sensitive product or personal data will need Health Insurance Portability and Accountability Act (HIPAA) compliance. They are legally liable to protect such data and may need cyber insurance policies.
Challenges for Cannabis/Hemp Insurance in 2020
The hemp/cannabis industry faces unique risks because it is young and has a quasi-legal status. Insurance has remained scarce and often unaffordable because insurers are not yet sure of the risk profiles of hemp/cannabis businesses.
Cultivation woes: Although hemp may bring farmers profits, growing it can be quite laborious. Many may not have the necessary equipment to cope with it. New machinery and retrofits can be expensive.
They also face many other problems, including seed fraud, thieves stealing plants mistaking them for marijuana, and oversupply. Apart from these, inclement weather and delayed plantingmay cause the harvest to be less than profitable.
Product liability insurance: The product liability premium rates for cannabis businesses may rise in 2020 because of the increasing E-cigarette or Vaping Product Use-Associated Lung Injury (EVALI) cases. Insurance providers may be stricter about underwriting and ask for insurance certification from vendors and additional insureds on third-party policies.
Preparation for future growth and expansion: As the initial excitement of starting up or entering the industry is dying down, businesses now have to take stock of further growth needs. Those who do not have good financial backing, robust systems, or well-managed processes may face challenges.
As many companies join hands to form multi-state operators, the U.S. Securities and Exchange Commission (SEC) or investors will scrutinize directors and officers to check the investments they made. This might increase the demand for directors and officers (D&O) liability insurance in the future.
Regulatory testing: The standards for testing and grading of hemp/cannabis products in the industry are not uniform or reliable. Although many cannabis businesses standardize their ingredient labeling, some falsify labels, leading to lawsuits and claims. Penalties, fines, and non-compliance liabilities may increase if states start product testing and other regulatory activities.
Just like all other businesses, hemp/cannabis businesses also need insurance to protect their interests and handle liability exposures. They have had difficulties in obtaining it until now. However, the positive developments in 2019 and the work of agencies, such as Skyfront Insurance Services, which serve and protect compliant cannabis businesses bring hope to the cannabis industry.