Insurance supply for cannabis operators remains constrained as the legal market for their products continues to grow at the state level.

Lack of capacity for property coverage and directors and officers liability insurance is causing challenges for the sector as many insurers remain wary of supporting the industry while federal law still prohibits the use of cannabis. 

Some European insurers, however, are showing an interest in the market and the change in White House administration has fueled hopes for legislative and regulatory changes at the national level. 

The 2020 election cycle saw Arizona, Montana, New Jersey and South Dakota join the list of states allowing recreational cannabis use, bringing the total to 15. South Dakota also became the 34th state to approve medical cannabis use. 

But cannabis operators everywhere face pricing and capacity issues. 

“There’s a whole bunch more cannabis companies out there now, in legal states, that need insurance, but there isn’t a whole bunch more capacity available in the marketplace,” said Mathew Grimes, practice leader for the cannabis specialty group at Hub Colorado, a unit of Hub International Ltd., who also sits on the risk management and insurance committee of the National Cannabis Industry Association.

Amid the tough market, Mr. Grimes said, the committee expects to publish the first version of its risk prevention manual in the first quarter of the year with ongoing updates to follow, as well as conduct a series of webinars about insurance for cannabis operators. 

On the property insurance side, some new capacity is emerging at the excess level, sources say.

Some capacity has become available over the past few months from European markets, said Justin M. Lehtonen, vice president at wholesaler Worldwide Facilities LLC in Los Angeles.

“We’re seeing capacity enter the market now in anticipation that we are entering a more favorable regulatory environment,” he said. 

With more legalization in states and the Democrats, who have championed cannabis reform, in control of the White House and Congress, expectations are rising for cannabis industry growth (see related story).

There’s been a “huge need” for excess property capacity, Mr. Lehtonen said.

“The No. 1 thing operators are looking for is capacity to handle their possible maximum loss. There are some operators which have an exposure, for instance, to a hurricane, which could be a $50 million or $100 million event, and they have only a fraction of that in capacity,” he said.

Multistate cannabis operators with large grow and processing facilities often can access only $20 million to “maybe $40 million” in coverage, said Jay Virdi, chief sales officer for Hub’s cannabis insurance and risk services in the U.S. and Canada.

“They need a lot more than that,” he said. 

Insurers have been more responsive with providing multistate policies, said Ian A. Stewart, a partner with Wilson Elser Moskowitz Edelman & Dicker LLP in Los Angeles.

“Operators are looking for one policy for general liability, for instance, which covers multiple operations in multiple states,” he said. “Insurance buyers and brokers are demanding it, saying, ‘This is what we need,’ and insurers are responding.”

Mr. Stewart added, however, that with many specialty lines “it’s the same old story. The limits are not there and getting reinsurance is difficult.”

Mr. Virdi also cited reinsurance as a limiting factor in cannabis insurance markets.

“A lot of insurance companies have told us that is another reason why their organization is not able to deploy any capacity or play in the space,” he said.

The supply of D&O capacity is also tight, sources say (see related story).

“The supply demand curve is not where it needs to be right now,” said Brad McDonald, executive vice president, financial lines co-practice leader, in Castle Rock, Colorado, for CAC Specialty, an affiliate of brokerage Cobbs Allen. “There’s much more demand than there is supply.” 

There are, however, no signs of new capacity coming to the cannabis D&O sector, said Brian Savitch, senior vice president of financial services at Worldwide Facilities in San Francisco.

D&O is a “very challenging placement,” said Mr. Virdi of Hub.

There are few insurers offering management liability coverage to cannabis companies, Mr. McDonald said. “It’s a very limited marketplace. Less than a handful will write directors and officers and other executive liability lines.”

D&O coverage for public cannabis companies with U.S. operations can start at $200,000 per million of coverage, he said. 

Colin Daly, executive vice president, financial lines co-practice leader, in Littleton, Colorado, for CAC Specialty, said less expensive D&O coverage can have substantial exclusions.

“Some of the lower price cover may exclude broadly anything having to do with THC,” he said, referring to tetrahydrocannabinol, the main psychoactive component of cannabis. 

The rising market in many other insurance sectors is inhibiting further participation in the insurance market for cannabis operators.

“We’re already in the closest thing to a hard market since 2002,” Mr. Savitch said. “Carriers are limiting their capacity and getting more rate for it outside of cannabis, and their buckets are filled even with them charging more rate and deploying less limit. Why would now be the time they wanted to move into a more risky segment when they don’t need the money?”

Still, the market is easier than a few years ago when the burgeoning sector began its rapid expansion.

“You can get more insurance of a better quality today than you could in 2015,” said Mr. Lehtonen of Worldwide Facilities. “Things are trending in a positive direction as a whole.”