Published in Finance

Top rating could boost new liability insurance carrier for cannabis industry

BY Sunday, July 07, 2019 07:00pm

GRAND RAPIDS — Securing a top rating for financial stability could boost business for a West Michigan company that underwrites product liability insurance coverage for the cannabis industry.

The renamed Specialty Agriculture Insurance Company of America earned the “A, Exceptional” rating from Demotech Inc., a Columbus, Ohio-based firm that analyzes and evaluates the financial stability of regional and specialty insurers.

Since receiving the top rating in late May, parent company Specialty Agriculture Risk and Financial Association LLC (SARFA) has been contacted by more national insurance brokers with clients in the cannabis industry who are operating or planning to operate facilities in Michigan.

“It appears to be a game-changer, specifically because we are now attractive and can do business with any national broker,” said Kevin Cross, vice president and co-founder of SARFA, which created the insurance company. “We are now on the radar of national brokers outside of Michigan.”

As Michigan prepared to issue licenses for medical marijuana, Cross and John Briggs formed SARFA in early 2018 to offer professional financial services to the industry. Although Michigan voters first approved allowing medical marijuana a decade ago, the state gave the industry greater structure under a 2016 law that established a licensing process.

The Specialty Agriculture Risk and Financial Association, formerly known as the Michigan Cannabis Risk and Financial Association, subsequently created the Specialty Agriculture Insurance Company to underwrite product liability policies.

In Michigan, state law requires companies to carry a $100,000 liability insurance policy in case a patient is harmed by adulterated medical marijuana or marijuana-infused products.

The association created the company to fill an emerging market need, since Michigan lacked a carrier to write the product liability policies.

“We couldn’t find an insurance company so we decided we’d form our own,” said Briggs, president of the Specialty Agriculture Insurance Company.

The “A” rating from Demotech “demonstrates our commitment to offering best-in-class cannabis insurance products that satisfy state licensure requirements and protect Michigan businesses and consumers,” Briggs said.

Building momentum

Recently, interest in the company’s coverage options — as measured by quoting activity and written policies — has picked up significantly. That increased activity followed a “much slower process than we anticipated” at the start of the company’s formation because the state was slow to issue licenses to companies involved in medical marijuana, Briggs said. That changed after Gov. Gretchen Whitmer, who took office in January, issued an executive order on April 30 to centralize marijuana regulation into a new state agency.

In its first public meeting on June 13, the Marijuana Regulatory Agency reported it had processed 173 pre-qualifications and issued 40 state operating licenses since April 30. That represents a 122-percent increase in pre-qualifications and a doubling of operating licenses issued over the previous seven months.

As of June 13, the state had 202 active licenses for medical marijuana operators.

Briggs expects the market within Michigan to emerge steadily in the coming months after the change in the regulatory structure, particularly following voter approval of a November ballot proposal that allows the use of recreational marijuana.

The insurance company’s market opportunity outside of Michigan should expand as well, Briggs said. He points to Illinois, where lawmakers also recently approved recreational marijuana.

“That wave is coming across the country pretty quickly,” Briggs said. “It’s an emerging market for sure.”

However, Briggs believes that business will not come as quickly as many people think, even with the legalization of recreational marijuana in Michigan.

There remains a lack of understanding among some cannabis operators as to why they should buy product liability insurance, which Briggs likens to liquor liability insurance. As well, the state has just begun to lay out the methodology for regulating recreational marijuana, he said.

“The problem is you have something that’s been illegal for so long and when you turn around and make it legal, now you have to set up an industry that supports that, and you’re trying to set up an industry that was counter-culture for years,” Briggs said.

“It’s just different. It’s going to take a while. It’s not like a technology play where it’s going to move forward pretty quickly and the market’s going to expand really quickly. It takes time for people to get their minds wrapped around it,” he said.

Growth opportunity

A report issued by the East Lansing-based Anderson Economic Group LLC estimated that marijuana for recreational use by adults could become a $1.4 billion industry in Michigan in the years ahead.

The analysis estimated that recreational marijuana use would generate $492 million to $640 million in sales for the first year after Proposal 1 passed. The industry would grow to sales of $767 million to $1.4 billion annually “once the market reaches maturity,” according to the Anderson Economic Group report, which estimated low- and high-growth scenarios for the industry.

When revenue from the sale of medical marijuana is added in, the industry could reach $1.6 billion to $2.2 billion. The estimate includes a decline in medical marijuana sales with the legalization of recreational use, according to the analysis.

As the industry emerges in the months and years ahead, the Specialty Agriculture Risk and Financial Association will consider adding other financial products for the industry such as title insurance, Cross said.

The association also has looked into the potential to form a state-chartered credit union or bank, an idea that’s on hold as Congress considers a law that would allow financial institutions to avoid penalties when they serve the industry in places where marijuana is legal. The banking industry has been reluctant to enter the cannabis industry, since marijuana remains illegal at the federal law.

The proposed Secure And Fair Enforcement (SAFE) Banking Act has passed a U.S. House committee. A House Appropriations Committee last week approved a separate spending bill that includes language allowing banks to serve the cannabis industry in states where it’s legal.

Gov. Whitmer last week joined a group of 19 governors in a letter to Congressional leaders urging passage of the SAFE Banking Act.

“There is an inherent danger for businesses operating in an all-cash business because financial institutions are unable to accept the risks and penalties associated with providing service to this industry under current law,” Whitmer said. “This letter sends a clear message to Congress that our states are looking for a real solution to a real problem, and we support them to get this done.”   

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