Legal Marijuana: Implications for the Insurance Industry
Examine the implications on insuring this industry for employee benefits
Over the past few decades, we have witnessed rapid growth among states considering and authorizing the use of Medical Marijuana. Throughout this period, these have been limited, strictly managed programs run by states, which vary widely in their uses and regulations with a blind eye from the federal government where it remains illegal for adult use.1
More recently, recreational use has started to increase. Since 2010, California began ballot initiatives that at first failed. However, two years later, ballot initiatives were up for vote in three states that had previously failed – Oregon, Colorado and Washington state. The latter two states became the first to permit recreational use. Since these first steps going into 2020, 11 states have approved recreational marijuana use to date.2
As underwriters throughout the industry examine multiple products, how should these groups be treated, once the novelty of this recently available market is presented to insurers?
This map illustrates the current state of marijuana regulation.
While these states have legalized recreational use, the federal status of use causes restrictions on the industry’s use of banking facilities, which impacts everyday needs such as loan availability and daily banking transactions.4
The federal government has been making moves that perhaps anticipate the loosening of these restrictions, such as enacting legislation permitting Credit Unions to handle banking for this industry without penalty on August 5, 2019. The Senate also recently signed off on approved House legislation titled the “Secure and Fair Enforcement Banking Act” in December 2019 that has yet to move forward, but plans to:
- Allow Financial Institutions to openly serve the Cannabis Industry, and
- Protect Veterans legally employed in the Cannabis industry from discrimination for Home Loans.5
The trend continues:
- States anticipated to approve in 2020 include New York, New Mexico and Minnesota.
- A total of 26 of the 50 have approved some level of decriminalization of marijuana use.
- Some form of Marijuana use is permitted in 47 of 50 states, the 3 not permitting are South Dakota, Nebraska and Ohio.6
The assessment in this article was conducted prior to the global COVID-19 pandemic and quarantine developments. As such, an already risky industry requires a separate pure financial review as well.
Group benefits have seen modest growth over the past decade, as we rebound from the recession in 2007, and employment growth has only recently been rebounding and reaching a peak with unemployment levels south of 4%.7
As a result, we have seen interest from carriers to consider the marijuana industry for insurance/group benefit purposes. Generally, insurance carriers to date have included this industry on the Excluded or Restricted risk listings. Many carriers have not been willing to quote on these because of lack of information on the topic, while others have not due to the federal illegality issue.
Interestingly, these accounts can sometimes be hard to identify as they may be combined with other Agricultural type firms or their names make identification of the business difficult.
Once all federal and state restrictions are removed, what are the opportunities from a product risk standpoint?
Industry opportunities will include the following types of businesses:
Dispensaries and Marijuana Stores
- SIC Codes – 5993, 5999 NAICS Codes – 453998
- Industry includes Medical Marijuana Dispensaries and Retail stores for Recreational use.
- This is a multibillion-dollar global industry, experiencing strong growth
- Regardless of challenges, capital is steadily flowing into the industry
- Estimated number of retail establishments in the US rage from 3,000 to 5,0008
The number of these firms and makeup of their operations vary by state, as each must adapt to current regulations for the state in which they reside. In locations where recreational use has existed for a few years, shops resemble a product showroom where the employees essentially operate in sales or typical retail positions with similar earnings levels. In states that have more recently permitted recreational use, the product offering typically differs to be more generic in order to meet new demands. The workers in these stores also tend to be less sales-oriented and more similar to cashiers.
Typical risks for job types and income levels in the industry include:
- V.P., Manufacturing or Retail: $80,000 - $167,000
- Director, Cultivation, Extraction or Retail: $59,800 - $124, 200
- Manager: $35,000 - $122,000
- Cultivation, Extraction, Quality, Compliance, Retail
- Supervisor, Production: $44,200 - $77,500
- Chemist: $51,600 - $81,500
- Edibles Specialist: $35,300 - $63,000
- Grower/Horticulturalist: $13.10 - $19.80/hr
- Bud Tender: $12.50 - $18.00/hr
The occupations outlined above are not too far off from a typical retail operation. In this example, the account had long-term disability insurance with a $10,000 maximum in force. As such, there are carriers currently taking the plunge in covering these groups.
Farming Offshoots – Medicinal Chemicals and Botanical Products
- SIC Codes – 2833 NAICS Code 3525411
- Industry can be camouflaged as they show up as Herbal and supplement firms
Firms in SIC 2833 (manufacturing bulk organic and inorganic medicinal chemicals and their derivatives; or processing, grading, grinding, and milling bulk botanical drugs and herbs) have been operating for some time and we have generally been able to identify them as ineligible groups for coverage, given most agricultural firms do not generally cover many employees outside of white collar carve outs.
These firms have seen growth in general, given new opportunities in the use of hemp and cannabidiol (CBD) oils that have become more popular since the passage of the 2018 Farm Bill – which formally opened the door to industrial hemp production.9
Prospects for the Industry
Originally, we expected growth in the marijuana industry over the near term as recent news focused on the potential revenue streams available to states that have experienced revenue shortfalls.
More recently, a financially challenged state, Illinois 10, legalized recreational marijuana to great fanfare. January was the first month of legal availability and the Chicago Tribune published the following headline: “Recreational marijuana sales in Illinois generated more than $10 million in tax revenue in January”.11
The health impact of these efforts is routinely ignored at the expense of the potential revenue. Also, perhaps more importantly for politicians, the legalization does create jobs. Bloomberg News provides the following on employment in this sector:12
Pot Is Still a Jobs Creator in the U.S.:
- The U.S. sector employed 243,700 people at the beginning of 2020
- This figure is up 15% from a year ago
- Jobs have doubled in number since 2017
- The U.S. added 32,700 cannabis jobs last year
Top States Employment by Jobs:
- California – 39,800
- Colorado – 34,000
- Washington – 23,800
- Oregon – 18,300
- Florida – 15,500
The combination of new revenue and job growth, in tandem with a public that fully supports recreational marijuana legalization, makes for a powerful argument for this industry to continue to expand. Note, in November 2019, Gallup reported that support for legalization had held steady, with 2018 approval at 66%.13
Investors and Opportunities
There have been some downsides on the financial success of the marijuana industry. A February 2020 meeting of the National Cannabis Industry Association (NCIA) in Boston discussed issues around many companies in the industry struggling financially, along with their vendor complaints about being stiffed on billings, and investors preferring to stay on the sidelines. Many companies also reported reduced earnings due to changing regulations around vaping safety in addition to focusing on cost cutting measures and potential merger opportunities.14
In April 2020, amidst the unprecedented COVID-19 financial environment, The Motley Fool reported that two major companies in the marijuana business, Aurora Cannabis and Canopy Growth, had announced 500 worker layoffs each prior to the current challenges. Both are larger employers in this space and smaller firms are under even more pressure to raise cash in order to grow their operations to a reasonable cost level.15
Although the exact effects of the situation cannot yet be predicted, more layoffs and bankruptcies are expected, as the anticipated recession is projected to drive down demand for recreational use given financial pressures on customers.15
Insurance Risk Assessment
The purpose of this review is to determine what type of employee risk is represented. As underwriters throughout the industry examine multiple products, how should we treat these groups once the novelty of this recently available market is presented to insurers?
While marijuana is currently on the excluded and restricted industry list for most group insurance firms, one day it will be targeted as prospects similar to those in the gaming, casino and Indian Tribe groups.
As noted earlier, newly established companies rushed in to build staff, locations and product delivery methods to meet the novelty of the new opportunity. That, coupled with the positive reception in the U.S. where each state is finding new revenue sources, gives the impression of a viable industry.
As the COVID-19 global pandemic is expected to bring on significant economic uncertainty, 2020 may not be the best time to determine whether underwriters should be making the jump to consider these groups for coverage, particularly those insuring income such as short-term disability (STD) and LTD.
As seen in all newly established industries, there will be high turnover, layoffs and restructuring. Although some will develop to be successful, many will fall by the wayside. This is not unlike new companies in any industry, which is one of the reasons many insurers do not cover groups unless they have experienced success and have been in business for at least two years.
Looking at the global experience, we believe that the marijuana industry can eventually grow to the point of operating like other retail and manufacturing firms, with all the ups and downs of surviving as a going concern. However, for the near future, it is our recommendation that excluding these industries would be the most prudent approach, given the anticipated turmoil in this developing business. We expect that those taking the jump this year can expect to have more trouble than the typical retail businesses making and selling established products.
1Berke, J., Gould, S. (2020). Legal marijuana just went on sale in Illinois. Here are all the states where cannabis is legal. Business Insider.com. https://www.businessinsider.com/legal-marijuana-states-2018-1 2Borchardt, D. (2020). Headwinds Threaten Cannabis Industry as Earnings Roll Out. RealMoney.TheStreet.com. https://realmoney.thestreet.com/investing/stocks/earnings-preview-as-cannabis-companies-face-headwinds-15246161 3D’Elia, A. (2019). Why hemp could take off (and how the shutdown is fueling uncertainty). Pbs.org. https://www.pbs.org/newshour/nation/why-hemp-could-take-off-and-how-the-shutdown-is-fueling-uncertainty 4Dun & Bradstreet, First Research (2020). Marijuana Stores Industry Profile. Hoovers, Inc. https://www.firstresearch.com/Industry-Research/Marijuana-Stores.html 5Fisher, A. (2020). The highest-paying jobs in the cannabis industry. Fortune.com. https://fortune.com/2020/03/12/highest-paying-pot-jobs-cannabis-industry-legal-weed-salaries/ 6Jaeger, K. (2019). Credit Unions Won’t Be Punished For Working With Marijuana Businesses, Federal Regulator Says. Marijuana Moment.com. https://www.marijuanamoment.net/credit-unions-wont-be-punished-for-working-with-marijuana-businesses-federal-regulator-says/ 7Jagielski, D. (2020). There Are Big Changes Coming to the Cannabis Industry in 2020. The Motley Fool. https://www.fool.com/investing/2020/04/05/there-are-big-changes-coming-to-the-cannabis-indus.aspx 8Jones, J. (2019). U.S. Support for Legal Marijuana Steady in Past Year. Gallup.com. https://news.gallup.com/poll/267698/support-legal-marijuana-steady-past-year.aspx 9Liccardo Pacula, R., Smart, R. (2017). Medical Marijuana and Marijuana Legalization. Annu Rev Clin Psychol, 13, 397-419. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6358421/ 10Marotti, A. (2020). Recreational marijuana sales in Illinois generated more than $10 million in tax revenue in January. Chicago Tribune.com. https://www.chicagotribune.com/marijuana/illinois/ct-biz-illinois-legal-weed-tax-revenue-20200224-iorl7m53qfburbrh7lv7gzszhm-story.html
11O.Berk.com (undated). Marijuana Laws by State in 2020: A Legal Weed Map and Short Guide to Regulation. O.Berk.com. https://www.oberk.com/marijuanalawsbystatein2020 12Owram, K. (2020). Layoffs About But Pot Is Still a Jobs Creator: Cannabis Weekly. Bloomberg.com. https://www.bloomberg.com/news/articles/2020-02-09/layoffs-abound-but-pot-is-still-a-jobs-creator-cannabis-weekly 13Pierog, K., Lewis, M. (2019). Forecast points to deepening Illinois budget deficit. Reuters.com https://www.reuters.com/article/us-illinois-budget/forecast-points-to-deepening-illinois-budget-deficit-idUSKBN1X22RG 14ProCon.org (2018). History of Recreational Marijuana. ProCon.org. https://marijuana.procon.org/history-of-recreational-marijuana/
15TradingEconomics.com (2020). United States Unemployment Rate.com. https://tradingeconomics.com/united-states/unemployment-rate