Best’s Commentary: Recent Trump Administration Executive Order Could Provide Impetus Toward Stabilizing the Cannabis Insurance Market

OLDWICK, N.J.--(BUSINESS WIRE)--The Trump administration’s recent executive order to fast track the reclassification of marijuana under federal law could lead to meaningful changes for cannabis-related businesses, which currently require highly specialized types of coverage and a more complex underwriting process, according to a new AM Best report.

The order signed by President Trump is focused on increasing research efforts around medical marijuana, and potentially yielding a better understanding of its medical risks and benefits to the U.S. population. While the executive order doesn’t immediately legalize marijuana or resolve access to insurance issues for cannabis-related business (CRB), the rescheduling of marijuana’s classification could entice more traditional banks and financial institutions toward the cannabis industry.

“The executive order does not guarantee access to banking or insurance,” said David Blades, associate director, AM Best. “However, increased financial access generally leads to a more formalized and less risky business environment, which would benefit the insurance industry.”

An immediate advantage for the cannabis industry concerns the business tax break for companies making Schedule III drugs, in contrast to no tax breaks for companies making Schedule I drugs, which is how marijuana had been classified. The current tax code disallows CRBs from deducting typical operating expenses that other legal businesses are able to, such as rent, utilities, employee wages, insurance and marketing costs. The reclassification could save hundreds of millions of dollars in taxes for businesses licensed to sell marijuana in states where it is legal.

The report also notes that rescheduling would serve as a formal signal of the federal government’s shift acknowledging acceptable medical uses of marijuana, which would be beneficial in removing regulatory red tape and some of the historical stigma that has made insurance companies reticent about providing coverage for CRBs.

Banks and insurance companies will still have to comply with federal anti-money laundering rules and other regulations, which is a major reason why many are still reluctant to fully engage with the industry without specific legislative protection.

National insurance carriers who are weary of adverse legislation have stayed out of the CRB insurance marketplace. In the current market, available CRB insurance is relatively expensive due to risks associated with cash-heavy operations, high-value inventory, and a rising occurrence of product liability claims from contamination or mislabeling. “The risk/cost asymmetry and federal illegality have rendered the sector as a specialized risk class most suitable for handling in the excess & surplus lines market,” said Alexander Winant, associate analyst, AM Best.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=361913.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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