Takeaways from Our Conversation on Cannabis Captives

If you ask around about cannabis captives, you won’t find out much. It turns out there are few if any captives for cannabis companies.

However, as the industry matures, interest in forming captives is sure to grow, and some brokers have been gearing up to focus on helping cannabis companies set up captives when the time comes.

With premiums for several lines of insurance still relatively high, and the industry strapped for spare cash lately, some say the time for cannabis captives is at hand.

For our latest podcast we interviewed Wes Sierk, managing director at Risk Management Advisors, who is hyper-focused on cannabis captives, for our latest episode.

Following are takeaways from that conversation.

“In my experience, this is a sophisticated insurance purchase…you’ve been in this industry for a while, so you know that the sophistication level of the cannabis operators continues to evolve,” Sierk answered in response to why he thinks the time is right for cannabis captives. “So, you have more and more and more sophisticated purchases (of all financial products) in the cannabis industry. They’re now sophisticated purchases of insurance and they’re looking for alternatives. So that’s where captives have come in.”

One potential driver of cannabis companies into captives are relatively high premiums, which have come down for some lines – yet they’re still high compared to other industries.

“So, premiums, I will say have come down. I mean, if we were talking two years ago, you could have a D&O policy that’s $1 million policy limit, where the deductible’s $250,000 and the cannabis owners were asked to pay $750,000 to $800,000 for that policy. Now, it’s down to $500,000. But that’s still a lot if you look at it.”

He added: “When the premiums and deductibles get closer and closer to the policy limits, that’s when you know the cannabis business owners are waking up and asking, ‘What am I actually buying insurance for?'”

If captives do catch on in the cannabis industry, he sees this as a sign the industry has further matured and grown.

Oddly, this figurative sign of growth may come amid a literal shrinkage of the industry.

Long-legal states like Colorado and Washington are snow struggling, cannabis companies across the industry are marking layoffs, stock prices are falling, all as a glut of cannabis flower has driven down wholesale prices.

The resulting belt-tightening is causing companies to look closely at their budgets.

“So, now insurance is becoming bigger and bigger part of their line-item and their budget,” Sierk said. “So, they’re looking to ask, ‘OK, how can I reduce or take some control over that huge expense.'”

His answer to their question is, of course, captives.

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Topics Cannabis