As pot businesses, insurance grow: What about risk mitigation?
Cannabis regulation is now top-of-mind in Washington, D.C. Pot reclassification could shake up its insurance outlook.
While trying to predict federal regulatory moves is like looking into a foggy crystal ball, Washington, D.C. insiders report that 2024 may be the year that the U.S. Justice Department recommends the removal of cannabis from the list of Schedule I drugs.
To say that such a move would dramatically impact industrial cannabis and hemp businesses and their partners (including insurance carriers) is a vast understatement.
Rocco Petrilli knows well the stronghold that complex state and federal regulations have had on the cannabis industry, which blossomed over the past few decades despite the absence of government legislative and financial support. (The U.S. cannabis industry is projected to generate nearly $43 billion in revenue in 2024, according to Statista.) The industry’s mind-numbing regulatory tap dance and inconsistent enforcement structure is one reason the nonprofit National Cannabis Risk Management Association, of which Petrilli was the longtime chairman, recently restructured into a for-profit risk management and insurance-solutions firm.
In a recent conversation with PropertyCasualty360.com, Petrilli argued that rapid growth in cannabis has come at the cost of top-shelf risk management. Keep reading for an abridged version of that conversation.
PropertyCasualty360: Describe what happened to the National Cannabis Risk Management Association?
Rocco Petrilli: When we first formed, NCRMA was a not-for-profit. It was an association [focused on] driving risk management through the cannabis industry. Then, our lawyers and accountants advised us that being a nonprofit involved in cannabis put a target on our back. So we changed to a for-profit and created a risk assessment tool that we commercialized. It’s called IMPACT. At that point, we rebranded as a for-profit company called National Cannabis Risk Prevention Services (NCRPS). The idea was to tie proper, skilled, educated and focused risk management to the insurance process.
PC360: It’s been nearly three decades since California became the first state to pass a medical marijuana law. In the years since, dozens of U.S. states have followed suit by legalizing medical pot, recreational pot, or both. There’s also a lot more insurance available to cannabis businesses than there used to be. With all of this in mind, what would you say has been the most dramatic recent change in the cannabis business?
Petrilli: I’m a risk manager. Looking at it through that lens, obviously, there is an overwhelming amount of regulation and restriction; a lot of what Alan Greenspan called irrational exuberance. This irrational exuberance has caught up with the industry because there were high valuations, and those evaluations are not performing to pay back the capital at the terms that were agreed upon… The impact of less capital availability on a market that’s grown as quickly as cannabis is strangling companies’ ability to find their direction. They now lack the funding and time that they need to really improve the business.
There’s also a certain amount of confusion that’s hampered the ability of these companies to react to change. It’s been very, very frustrating, and it’s become difficult for the smaller businesses to survive.
PC360: This almost sounds messier than the early days of legalization, when the cannabis industry largely involved mom-and-pop independent businesses… Can you list some of the dominant or perhaps most challenging risks facing today’s cannabis enterprises?
Petrilli: Of course you have the major property issues; flooding, fires and so on. And then, the real challenges for the insurer, involve capacity. [Insureds] have to have a pretty solid balance sheet to be able to cover the collateral that’s necessary to cover the size of some of these policies.
Product liability is another one I like to talk about. It’s the shark lurking in the shallows. In the production of cannabis, people sometimes cut corners and don’t do a lot of what we feel is necessary, like follow-up testing to identify contamination risks.
PC360: Nonetheless, the number of insurance carriers servicing the cannabis industry continues to grow.
Petrilli: Speaking bluntly, it’s people seeing an opportunity to make a buck. I’ll probably ruffle some feathers with that statement, but I think this growth has really been at the expense of true risk management.
PC360: Why do you say that?
Petrilli: It’s the conditions. Risk management and underwriting are the conditions that ensure the right kind of policy. I just see the growth in insurance, and I don’t see the growth of what I’d call effective risk management… We want to get to the root cause of risk, because mitigation leads to prevention. We truly feel that effective risk management will improve insurer loss ratios.
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