Cannabis Cultivation Market Expanding, But Insurance Might be a Headwind

By | June 11, 2020

The cannabis cultivation market in the U.S. continues to expand, though COVID-19 will affect or is affecting the majority of these businesses, while operations get bigger, facilities become more numerous, and overall profits continue to increase, according to a report out this week looking at the past five years for the industry.

The Cannabis Business Times State of the Industry report shows the average reported revenue inched up from $3.73 million in 2019 to $3.74 million in 2020, with 27% of companies reporting that profit increased in 2020 compared with 22% reporting that in 2019.

It’s not all roses for cultivators, and one headwind not identified in the report is the insurance market.

Cannabis cultivators, like most cannabis businesses, face what some would consider a hard insurance market.

“The market’s hardened in so many areas, property especially, where companies don’t want to write it,” said Morgan Moore III, founder of NutraRisk and a life science practice leader for Worldwide Facilities. “The bar is very low to enter into the space, so nobody wants to write it.”

On the property side, this is largely due to a lack of capacity, which has made pricing the front-and-center consideration of too many insurance buying decisions being made by cultivators and other cannabis operations, he added.

“It’s a function of ‘What’s your pain threshold,'” he said. “There’s just not enough markets in the space.”

The problem is made worse because cannabis is a newer industry, and one in which there are companies that have sophisticated insurance buyers, as well as businesses that just want to get by.

“You have a fusion of the black-market cannabis grower meets big ag,” Moore said.

More has clients who understand coverage well, as well as “the guy coming from Chico or Humboldt, and he’s got a license.”

Oftentimes multimillion-dollar businesses, which may just need liability coverage to get a license, are asking for the bare minimum in coverage and they are accepting insurance products that cover few of the important risks that should be covered, he said.

“They’re saying ‘I just want insurance, I don’t care about the coverage,'” he said.

Another headwind, one identified in the report, is the ongoing pandemic.

The Cannabis Business Times report surveyed cultivators about the impacts of COVID-19. The report shows 63% of participants indicated that the coronavirus has already affected their operations, with the following ramifications: decreased sales (23%); staff reductions/hours cut (22%); suspension of some operations (21%); and suspension of all operations (4%).

In the long-term, the report reflects optimism among survey respondents.

The vast majority said they plan to expand their cultivation operations, and since 2016 the number of participants who said they plan to add 25,000 square-feet or more of cultivation space increased from 20% in 2016 to 42% in 2020.

It appears more investment dollars could be coming into cannabis cultivation as well.

“The growing cannabis industry continues to attract interest, as indicated by the intentions of an additional 53 research participants who do not currently own or work for a cannabis cultivation operation but plan to in the next 18 months,” the report states.


Topics Cannabis

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