The great white whale of cannabis coverages: Outdoor crop
Parametric policies are helping cover outdoor cannabis farms.
With cannabis prices in California ranging from $200 to more than $250 per ounce, according to a consumer price index, coverage for a cannabis growing operation can be quite a heavy lift for traditional insurance policies. When moving the plants outside, exposing them to wind, hail, droughts, floods and other damaging weather, the ante goes up even further.
The challenges were such that some in the insurance space saw outdoor cannabis grows as uninsurable, making coverages for this risk something of a white whale. Yet, where there is a will, there is a way forward. Call it parametric insurance for outdoor cannabis grows.
Asked what led to the development of these policies, HUB International’s Evan Stait, MA, CAIB, says there was no alternative choice.
“Parametric insurance has been around for a while but hasn’t been widely used,” explains Stait, who is a commercial account executive for HUB. “The lack of traditional crop insurance and overall capacity to cover the values that many outdoor grows needed, led quickly to a parametric route of risk transfer.”
A brief primer on parametric insurance: When a predefined loss event occurs, and the loss event exceeds a specific dollar or index amount that was pre-agreed, the policy pays out. Using an example from the cannabis industry, average rain in a growing region might lead to a policy where if precipitation exceeds three inches in 15 days, coverage would kick in. Coverage is paid out on a “per unit basis linearly until the total amount of insurance is paid out,” according to HUB.
The points at which outdoor cannabis parametric policies kick in, also referred to as the strike point, are generally based on weather data that is location specific and supplied by nearby airports or weather stations.
A flexible policy
“The goal is to get as close as possible to the specific area. With agricultural risks, many owners are now installing their own weather stations for data purposes,” he tells PropertyCasualty360.com.
Depending on the type of risk, those buying these policies can choose to move strike points to accommodate better premiums, according to Stait.
“This is akin to attaining a higher deductible with traditional insurance. If you were insuring against frost, for example, you could set the strike point lower on the temperature gauge so that the policy only starts to pay out in more severe situations,” he explains. “This allows some flexibility, as maybe the risk of frost is concerning, but a grower is using a genetic strain that they believe is more tolerant.”
Another advantage to these policies is the ability of the purchaser to choose the limit, giving a grower or investor the ability to select the limit that makes the most sense from a budgetary perspective.
In addition to covering outdoor cannabis growing risks, parametric policies can also help mitigate the potential for losses. Stait explains this ability is a benefit to the insurer as well as the insured.
On the insurance side, as more data from these businesses accumulates, the industry will be able to more precisely determine the point when a weather event can start to damage crops.
On the other side, growers also rely on data “big time,” according to Stait.
“They may be contracting a third party already to monitor all weather and soil conditions via satellite and instruments on the ground,” he says. “The more data they accumulate, the better informed they are to make better growing and timing decisions, as well as which genetics are best suited.”
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