The Impact Of State-Level Legalization of Marijuana on the Insurance Industry

The changing legal status of marijuana in the U.S. is prompting insurers to begin offering coverages, despite having extremely limited loss data to inform them.

While marijuana remains illegal at the federal level, action is being taken on the state level to change laws on its consumption. More than half of U.S. states and the District of Columbia have legalized the use of medical marijuana and many of those now also allow the use of recreational marijuana.

The growth of this industry has led to the development of a nascent insurance industry to support it. However, these carriers often find themselves faced with tough choices to make on appropriate premiums to charge and coverage limits to offer because the risks associated with businesses related to this industry are still being defined. Many insurers are asking if it’s possible to quantify potential cannabis liability insurance losses?

Enter liability accumulation modeling.

Liability accumulation models can help insurers quantify the potential liability impacts of events on a supply chain. Each liability event is different.

While historical data can be used as a guide, the ever-changing landscape of economic, legal and regulatory factors can dramatically affect how liabilities will trigger and spread. A liability loss model enables companies to explore a casualty portfolio against its supply chains, and can help insurers understand the potential for claims and losses and how those losses could spread.

These models make it possible to quantify and manage risk by looking forward while being informed by realistic past events, and to enable real-time stress testing of scenarios to see how the far-reaching consequences of long-term liability events could unfold over time.

Marijuana is currently listed as a Schedule I drug under the Controlled Substances Act of 1970, a federal U.S. drug policy. Schedule I drugs have “no currently accepted medical use and a high potential for abuse” and are considered “the most dangerous drugs … with potentially severe psychological or physical dependence.”

However, 34 states have legalized medical marijuana and 10 of those have legalized recreational marijuana. And some carriers are providing insurance in states where marijuana is permitted. California, for example, has now approved six insurers to sell cannabis-related insurance products. In addition, some U.S. litigation has found certain marijuana-related claims to be insurable.

Overall, the size of the potential market is growing. About 20 percent of the U.S. population lives in a state where marijuana is regulated, and sales are expected to increase from $13.7 billion in 2019 to $23.4 billion in 2025. However, this rapid growth in market size and activity has engendered some concern, in part, because of the still limited scientific evidence available regarding potential benefits and harmful effects.

Although a 2017 report from the National Academies notes more research is needed to better associate cannabis use with various maladies and injuries — as well as whatever possible health benefits of marijuana — it does include the following potential harmful effects:

• Cancer: While there is some evidence that smoking cannabis does not increase the chance for lung, head and neck cancers, there is some limited evidence that cannabis may increase the chance for a type of testicular cancer.
• Heart attack, stroke and diabetes: There is limited evidence indicating an association between cannabis use and these conditions.
• Respiratory disease: There is some evidence suggesting smoking cannabis regularly may be associated with increased episodes of chronic bronchitis, chronic cough and increased phlegm.
• Mental health: There is some evidence that cannabis use may increase the risk of schizophrenia, social anxiety disorders and, to a lesser extent, depression. In addition, heavy use of cannabis may also be linked to suicidal thoughts, and daily use to an increase in symptoms for users with bipolar disorder.
• Substance abuse: There is moderate evidence linking cannabis use with abuse of alcohol, tobacco, and other illicit drugs.
• Cognitive domains: Learning, memory and attention impairments are associated with cannabis use, but there is limited evidence linking the continued impairment of these domains after stopping cannabis use.
• Pregnancy: There is some evidence that lower birth weight is linked to smoking cannabis during pregnancy.

• Injury and death: With cannabis use there may be an increased risk of a motor vehicle accident.
• Accidents in the workplace: States have generally included provisions in their medical marijuana statutes that accommodate existing employer drug-free workplace — including those that prohibit on-the-job intoxication.
• Infrastructure accidents: The risk of explosions may be high for growers, for example, because of the frequent use of CO2 to increase crop yield in greenhouses. There is also the risk of explosion for manufacturers during the processing of cannabis oils, which may include the use of butane gas.
• Product contamination: There have been concerns expressed about product contamination, mostly related to pesticides and other chemical crop treatments.
• Child intoxication and other risks: There is not enough research to quantify these.

General liability, including product liability, may potentially be impacted by claims, lawsuits and other issues related to commercially sold marijuana.

In addition, such activity could potentially impact professional liability for medical services.

There may also be potential impacts on directors and officers (D&O) liability policies, but coverage implications for the industry will need to be monitored.

In these changing times, insurers need to be proactive and know how much liability accumulation risk is on their books. Liability risk management tools enable companies to understand their potential risk by simulating how future liability events might unfold and spread through supply chains to ultimately affect their cedents. By providing a consistent approach to estimating liability event losses, these tools help insurers and reinsurers alike make informed decisions in everything from setting their policy conditions and limits to building their overall portfolio in this new but rapidly growing market.