Specialty Insurance

‘Great Opportunity’ Awaits California Cannabis Insurers: Exclusions Concern Brokers

California’s Insurance Commissioner Dave Jones is pleased with what his department has achieved so far but encourages more carriers to enter the cannabis market.
By: | July 18, 2018 • 6 min read

When California voters approved legal recreational marijuana in November 2016, the state’s insurance commissioner Dave Jones knew he needed to get rolling.

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“Shortly thereafter I launched a cannabis insurance initiative, the objective of which was to increase the availability of insurance for the cannabis industry across the supply chain and all of its coverage needs,” Jones said.

His approach was multi-pronged. Jones led tours of cannabis production facilities for insurance executives, convened a public hearing on the sector’s insurance gaps and added more resources within his department to make sure that carriers and brokers were responded to in a timely manner.

A Growing Cannabis Market

Surplus lines carriers were first into the market, but in 2017, California added an admitted carrier and has also seen sureties provide capacity for landlords that rent to cannabis operations.

“We are very pleased with the results,” said Jones, who continues to encourage carriers to enter the market. One of the keys to this effort is dispelling the notion that insurance carriers underwriting for cannabis might risk running afoul of the federal government, which still classifies marijuana as a Schedule 1 drug.

“I took note that the U.S. Senator from Colorado [Cory Gardner- R] met with President Trump, and President Trump indicated that the administration would not be enforcing federal laws against cannabis in those states that have legalized it,” Jones said.

“Although insurers are concerned about federal intervention, I think their concerns are misplaced and I think they should come to the market.” — Dave Jones, Insurance Commissioner, State of California

“We sent out yet another letter to the CEOs of the insurance companies that we regulate, pointing this out and assuring them that the risk of federal intervention is zero,” Jones said.

Despite his efforts, Jones said the federal prohibition is probably tamping down carrier appetite to cover cannabis operations.

“Although insurers are concerned about federal intervention, I think their concerns are misplaced and I think they should come to the market,” Jones said.

Mike Bush, a partner with Cleveland, Ohio-based National Cannabis Insurance Services, said business for cannabis insurance brokers and carriers has been building steadily in California.

“After licenses and regulations are fleshed out, the business operation needs to be fully insured to protect the business’ assets, ” Bush said. “California has been a leader in developing insurance solutions for cannabis operations and we have a number of markets willing to insure cannabis operations,” Bush said.

That said, Bush added there are a number of start-ups in the industry and that things take time to develop.

Dave Jones, Insurance Commissioner, State of California

“So I think everyone is finding things take longer than they thought, and then a rush of activity comes in spurts. Now we are seeing more of a steady stream of insurance applications,” Bush said.

Bush also noted his focus is making sure cannabis operations have the right coverages and that claims are paid out properly.

“Product liability and crop/inventory insurance are the big exposures for a cannabis operation,” Bush said.  “Once the right coverages are in place, the claims process follows the coverage form.”

Bush said though that he has already seen carriers put restrictive exclusions on policies without being transparent with the insured.

“It’s very important to review all applicable coverage limitations and exclusions prior to quoting,” Bush said. “If the claims process runs well, given how much public and media attention is being placed on the budding cannabis industry, then our industry will get favorable reviews,” Bush said.

He added his firm is offering insurance products to the cannabis industry in half a dozen states (and growing) with California being a target market.

Prioritizing the Right Approach

One retail commercial insurance broker who has been placing cannabis insurance coverage for more than a decade said he thinks Jones has gotten the insurance market in California off on the right foot.

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“I think Dave Jones’s office has done a great job as a state agency to work with this industry and say ‘hey, what are the issues you are facing and how can we address them?’ ” said Michael Aberle, a senior vice president with Next Wave Insurance Services, which offers a full suite of commercial insurance coverages to the cannabis industry.

Aberle is also the chair of the insurance committee of the California Cannabis Industry Association, a group which is working with Jones’s office and insurance carriers to educate cannabis business owners  about insurance coverage and risk management best practices.

Aberle thinks there are enough insurance carriers willing to serve the California cannabis market and ample capacity. His concern is more around the area of product liability coverage: how strict California’s regulators are going to be around labeling issues, the litigiousness of the state and the country in general, and as Bush mentioned, a preponderance of insurance form exclusions.

He sees a key coverage issue with labeling. Will marijuana products in smokable or other ingestible forms give consumers the benefits the label promises? And when the consumer is disappointed and litigates, how robust will the cannabis provider’s insurance coverage be in defending the cannabis company?

“I think Dave Jones’s office has done a great job as a state agency to work with this industry and say ‘hey, what are the issues you are facing and how can we address them?’ ” — Michael Aberle, senior vice president, Next Wave Insurance Services

“If you talk to any attorneys in the cannabis industry, the ability to meet the burden on labeling is going to be extremely tough. This is going to open the door to, I wouldn’t call them life shattering claims, but there are going to be enough of them that they could cause the carriers to bounce out [of the market],” Aberle said.

Should the federal government loosen its prohibitions on marijuana, Aberle added, that will create new exposures for those growers and sellers who sell their products across state lines.

“When this becomes legal, the FDA is going to regulate this,” Aberle said. Cannabis companies that envision national distribution in their futures will need to consider the product liability exposure ramifications of that.

“The faster you run to the finish line, you might find out you are so far behind (from a compliance perspective) that you haven’t learned what you need to run that operation,” Aberle said.

A Promising Future for the Industry

Jones said he sees in California cannabis a segment of the agricultural industry that is very well regulated and presents a good opportunity for insurance carriers.

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“Part of what I am doing is educating the insurance underwriters that cannabis is a heavily regulated industry. They have to track the product from seed to sale. In some ways, this should give the industry comfort as to who is compliant, who they can know is following the rules and can do the sorts of things that can mitigate risk. I think it’s a tremendous opportunity for the insurance industry and they should take advantage of it,” he said.

The state’s insurance department lists five carriers that are underwriting some aspect of the cannabis industry in California: Golden Bear Insurance, California Mutual Insurance Company, Continental Heritage, AAIS (not a carrier, but they have an admitted program), and California’s State Fund, which is not newly admitted but does offer workers’ compensation coverage to the cannabis industry.

The state lists more than 100 insurance brokers that are currently serving the cannabis industry in California.  In mid-August, HUB International, a global property/casualty broker, announced that it formed a cannabis and risk services practice, under its Agribusiness & Farm Specialty Practice.

“There is a huge misunderstanding in the cannabis industry about insurance coverage, which leaves businesses underinsured, or even uninsured,”said T.J. Frost, U.S. Cannabis Segment Leader for HUB.

HUB is offering general liability and product liability insurance, among a number of other coverages and services, including workers’ compensation and crop insurance. &

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]