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HUB International 2021 Outlook

Cannabis Industry

 

Transforming Uncertainty into Opportunity

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Record Growth Despite Persistent Roadblocks

Despite conflicting state/federal regulations, increased security threats, and extraction R&D risks, the cannabis industry continues to evolve.

A solid risk management program is needed to ensure future success.

The bourgeoning U.S. cannabis industry — worth an estimated $54 to $67 billion right now— continues to grow at record pace, despite conflicting state and federal laws that lead to roadblocks around just about every corner.

“Cannabis businesses that haven’t incorporated risk management will need to in 2021, especially when looking to secure funding from PE firms.”

While some cannabis operations were deemed 'essential businesses' in their respective states in the wake of the pandemic, similar operations in other states were still considered “illegal.”

This division continues to be the cause of major uncertainty for retailers, growers and consumers everywhere. And, unfortunately, the palpable tug of war between the states and the federal government will only increase when legalization is introduced at the federal level, putting tax dollars up for grabs.

This tug of war makes it difficult for cannabis businesses to obtain insurance, bank accounts and investors. It also means additional compliance and security challenges. It’s the reason the industry lacks support for start-ups and workers face primitive and sometimes dangerous R&D conditions in order to advance the extraction process.

As cannabis companies fight to grow their market share, many fall behind in instituting a proper risk management structure from R&D to daily operations. Cannabis businesses that haven’t incorporated risk management will need to in 2021, especially when looking to secure funding from PE firms.

As the 8th fastest growing industry in the U.S., recreational and medical cannabis sales are not likely to slow down anytime soon. Here's what to expect in 2021:

“Deemed 'essential businesses,' many retail outlets and dispensaries remained open throughout the pandemic and adopted new ways of serving customers, from curbside pick-up to drive-through windows and deliveries.”

1. COVID-19 will continue to advance cannabis industry growth — with a few roadblocks.

Deemed 'essential businesses,' many retail outlets and dispensaries remained open throughout the pandemic and adopted new ways of serving customers, from curbside pick-up to drive-through windows and deliveries. At the same time, the pandemic hindered growth for some cannabis operations on the cusp of obtaining a license, as many applications were put on hold when state offices closed their doors for months. In some cases that meant raised capital was pulled and funding ceased. For start-ups who want to apply again in 2021, it’ll be an uphill climb.

During routine COVID-19 inspections in 2020, state officials found a host of other issues at cannabis operations, including incorrect labeling, poor safety and health practices, lack of PPE compliance by staff and customers, incorrect counting of cash and more. In extreme cases, these visits resulted in regulatory fines and shutdowns. This led to the need to use seed money for something other than the organization’s original mission. In 2021, these scenarios are likely to lead to lawsuits from shareholders and activate Directors & Officers (D&O) and employment practices liability (EPL) claims from laid-off workers. These accusations dovetail with another major charge often levied against cannabis businesses —lightning speed growth without the business operations and risk management protocols necessary to support it.

Many cannabis businesses have not procured the necessary liability insurance coverage for the great risk that come with rapid growth. Whether it’s D&O and EPL policies as in the case above, or Cyber, Property or General Liability (GL) policies, it’s critical to think more holistically about insurance coverage. Cannabis operations must work with an insurance broker that specializes in the industry and understands different operations and business location, as exposures vary greatly.

As cannabis companies fight to grow their market share, many fall behind in instituting a proper risk management structure.

“A cannabis operation’s security risk is two-fold. In light of the looting and civil unrest across the U.S. this year, additional security measures were needed for cannabis businesses to secure their goods.”

2. Calling for more security from both inside and outside the operation.

A cannabis operation’s security risk is two-fold. In light of the looting and civil unrest across the U.S. this year, additional security measures were needed for cannabis businesses to secure their goods. Additionally, a common risk— employee theft —increased as well.

Cannabis retail operations maintain a large supply of cash and product. As looting occurred, it was impossible to relocate cannabis product away from retail storefronts as most state regulations prohibit cannabis to be removed from a retail facility. Owners and operators who did so risked losing their license or being fined for non-compliance.

The majority of cannabis theft — as high as 90% by some estimates — is employee related. In many scenarios, employees in cannabis grow facilities and retail storefronts scheme to cheat employers. Part of the challenge is that state regulations require plant and production facility blueprints to be publicly accessible. Thieves are using these layouts to plot their infiltration. In other scenarios, cannabis operators are recording walk-throughs of their facilities and publishing online documentaries. These also leave operators vulnerable.

Employers can reduce theft by restricting access exclusively to employee areas, while also investing in better internal access controls. Conduct an audit of your work areas with your cannabis insurance broker who can provide you with a list of best practices and do’s and don’ts for reducing theft.

“Extraction will be a major focus for cannabis organizations in 2021. Operations continue to search for a competitive advantage.”

3. Extraction R&D dangers and breakthroughs lead to novel risks.

Cannabis extractors will experiment with new ways to apply existing methods with ethanol and CO2 as well as innovative methods adopted from the agriculture industry, using water and light exposure and different nutrients for extraction. Extraction R&D will be a major focus for cannabis organizations in 2021. Operations continue to search for a competitive advantage to increase yield and develop a superior product. This becomes a potential liability when cannabis extractors modify the use of existing equipment for a different type of extraction. Flammable products are often used, and explosions are common.

If you are considering experimenting with R&D, engage your insurance broker to ensure the risk is covered within your existing policies and to explore best practices for experimentation and varying equipment use.

“At every step in the supply chain, cannabis business operators need to be proactive when it comes to managing risk.”

4. Growing pains persist in compliance, banking and financial services.

Although cannabis is legal for medicinal or recreational use in 43 states, business still struggle to secure bank accounts, business loans and insurance coverage. Small local banks and savings and loan businesses may be more willing to engage with cannabis businesses in 2021, while large institutions will still shy away.

At every step in the supply chain, cannabis business operators need to be proactive when it comes to managing risk. That means implementing risk management protocols to protect their business, their workforce as well as securing the right insurance coverage.

This also includes growing the cannabis business’ safety net by engaging necessary insurance policies, appropriate to the business’ size and exposure, including Cyber, Environmental Liability and Crime policies, or applying for emerging loan programs in an attempt to secure additional capital.

Even if the U.S. government takes steps to federally legalize cannabis, a bill won’t go into effect until later in the year, perhaps, more likely, in 2022 or beyond.

2021 Growth and Beyond

While the cannabis industry is changing, much will remain the same in 2021. Even if the U.S. government takes steps to federally legalize cannabis, a bill won’t go into effect until later in the year, perhaps, more likely, in 2022 or beyond. Until a bill is passed, cannabis businesses will look to remain viable beyond the state level. For all cannabis businesses, 2021 will be about building on what they’re already doing and preparing for what will hopefully come next.

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