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HUB International 2022 Outlook

Cannabis Industry

 

Stability, Creativity and Growth

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A Maturing Market Spreads Its Wings

The cannabis industry will experience the blessings and dangers of a rapidly growing industry, from the highs of opening new markets and revenue streams to the difficulties of finding adequate insurance coverage.

Finding equilibrium as risks and rewards multiply

With fast growth expected in 2022 — along with growing pains — cannabis operations will need to find creative ways to protect themselves.

As the industry enters its fourth year of legalization, the cannabis industry is looking both familiar and new.

Additional threats and higher premiums won’t inhibit industry growth, but cannabis businesses that prioritize risk management will benefit most

With widespread acceptance across the country of its product,1 the Canadian cannabis industry will find its sea legs in 2022, experiencing rapid growth and developing into a mature business.

Sales are still burgeoning, with monthly record sales of $319 million in June 2021.2 For 2021, Canadian sales are projected to reach US$4 billion, and US$6.7 billion by 2026.3

That doesn’t mean the industry won’t have major challenges, especially when it comes to insurance. Cyber coverage is expected to rise 30% or more, as cyber risks explode and more businesses seek coverage. Cannabis Property-Casualty coverage is also expected to rise 10% to 20%, except for businesses in catastrophe-prone areas, which will see increases of 20% and up.

These factors of additional risks and higher insurance premiums won’t inhibit industry growth, but those cannabis businesses that invest in risk management will be the ones that benefit the most.

1 Government of Canada, “Canadian Cannabis Survey 2020: Summary,” August 12, 2021.
2 MJBiz Daily, “Canada’s retail cannabis sales grow to CA$318.7M in June, another record,” August 20, 2021.
3 BDSA, “Global Cannabis Sales Surge 41% YoY in 2021; Will Surpass $62 Billion by 2026,” September 21, 2021.

Here’s what to expect from the cannabis industry in 2022:

Support from domestic insurers for cannabis businesses remains insufficient

Cannabis companies need guidance to cope with the risks of a market still in its awkward adolescence

1. Limited capacity will challenge the industry

It’s a source of constant frustration for the industry: Despite the fact cannabis has been legal for medicinal purposes since 2001 and recreationally since 2018, support from domestic carriers for Canadian cannabis businesses remains insufficient.

The carriers offering the most insurance support to Canadian cannabis businesses are located outside the country, resulting in capacity issues.

There are many reasons domestic carriers have not embraced the cannabis industry, including a lack of data integrity and general experience, foreign headquarters and the remaining stigma surrounding the product. In any case, markets are hardening across the board.

Unfortunately, cannabis companies will bear the brunt of the long learning curve, supporting their own risk longer than necessary. Cannabis companies will need guidance in coping with the risks of a fast-growing market still in its awkward adolescence.

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International partnerships promise a lifeline to struggling cannabis operations

2. More mergers will result in more risks

Stellar sales alone do not make an organization profitable — and when a company with good sales finds itself in the red, it usually finds itself ripe for acquisition.

Many cannabis operations are unprofitable, despite growing sales.4 At the same time, Canada had already hit a record number of mergers and acquisitions, with 29 deals made through June 2021, more than double for the same period in 2020.5

International partnerships offer a lifeline to struggling cannabis companies. At least two Canadian cannabis organizations have moved forward and earned EU Good Manufacturing Process certifications, which allow them to fill contracts in the European market. But this is a lengthy and expensive process and may not result in adequate revenue streams from abroad.6

Domestic M&A and international partnerships have major risk management issues. For instance, from a buyer’s perspective there’s the risk a desperate organization will cut corners or overstate results to make itself more attractive. Such risks make it essential to have adequate risk management measures and insurance, including Reps & Warranties (R&W) and Directors & Officers (D&O) coverage.

4 MarketWatch, “Canadian cannabis companies are still not profitable almost three years into full legalization, earnings show,” August 9, 2021.
5 BNN Bloomberg, “Why M&A in Canada's pot industry is expected to heat up this year,” June 4, 2021.
6 MJBiz Daily, “More Canadian cannabis companies receive EU-GMP certifications,” March 20, 2020.

The edibles market represents an enormous untapped market, but risk management issues have inhibited growth

3. The edibles market will pick up, but slowly

In 2020, the first year of legalized edibles, sales surpassed $100 million — but that comprised only 4.2% of regulated sales.7 It remains a huge, untapped market.

In part, the slow uptake results from risk management issues. As both a cannabis and food product, edibles occupy an unusual space: producers must follow food manufacturing regulations and cannabis businesses may lack the experience to make edibles, resulting in manufacturing issues.

In fact, there were two recalls in early 2021 due to mold,8 as well as recalls due to incorrect labeling.9

What’s more, regulations severely restrict the levels of THC in edibles, which leads users to turn to other ways of consuming cannabis.10

Expansion into the edibles market requires strong risk management and insurance. Edibles makers should audit their manufacturing process to minimize the risk of product mislabeling and recalls. Product recall insurance and general liability go a long way toward protecting cannabis companies from risk in the event of a major loss.

7 MJBiz Daily, “Canadian cannabis edibles sales top CA$100 million in first year,” April 23, 2021.
8 Food Safety News, “Complaints filed about mold in marijuana gummies with 1 sick; recall underway,” February 2, 2021.
9 MJBiz Daily, “Moldy cannabis gummies, mislabeled pre-rolls recalled in Canada,” February 26, 2021.
10 Cannabis Industry Journal, “Unnecessary Obstacles for the Canadian Edibles Market,” June 22, 2021.

The burgeoning farm-gate cannabis market offers the opportunity for smaller growers to battle larger competitors

4. “Farm-Gate” sales could change how Canadians buy cannabis

In a step toward a more open retail cannabis market, several provinces have approved farm-gate sales, allowing a licensed cannabis grower to sell their cannabis products directly to consumers.11

Farm-gate sales may create an opening for smaller growers to attract a larger base of support. Smaller growers have partnered to lobby government bodies as well as share knowledge.12

Any grower or producer that opens a farm-gate operation should contact a broker to make sure they have appropriate coverage for a retail outlet, including product recall, cyber and crime insurance.

11 CTV, “Farm-gate cannabis sales allow customers to buy pot straight from the farm,” May 2, 2021.
12 CBC, “Cannabis co-ops seek to bring small producers, processors into legal market,” February 10, 2019.

Cannabis companies exploring an expansion in psychedelics must navigate a thicket of legal and regulatory issues

5. The psychedelics market will continue to emerge

A natural outgrowth of the cannabis market, psychedelics including psilocybin and ketamine are beginning to draw attention as alternative mental health and wellness treatments.13 With similarities to the medicinal cannabis market,14 some cannabis companies are exploring expansion into psychedelics.

Organizations must move cautiously: Psychedelics are still illegal (with few exemptions). For companies seeking an entry point, it’s a good idea to consult with an experienced insurance broker — and seek legal advice — before moving forward.

13 MicroSmallCap, “Why Canada is Becoming a Hub for Psychedelics Research and Development,” March 17, 2021.
14 Green Entrepreneur, “Canada Is the New Hotbed for Psychedelics,” January 14, 2021.

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2021 Growth and Beyond

The cannabis market is still immature and undergoing change. Some changes are positive, including farm-gate retail and the growing edibles market. Other conditions are hampering growth, including risk management issues in the edibles market and carriers’ reticence or refusal to offer insurance coverage for the industry.

The result is that in 2022, cannabis organizations will have to seek out appropriate coverage to protect them from disaster but also need to explore new markets. They will be looking to their brokers and insurance professionals for guidance and best practices. In a rapidly evolving market, a broker with cannabis industry expertise can identify coverage options, advise on workplace safety and help point operations in the right direction.

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