Pot, Weed, Ganja, Mary Jane, Tea. These are all slang terms for marijuana, or, to use the more correct term, cannabis (this is actually a legal business now). Actually, I have never heard the terms “Mary Jane” or “tea”, but both were used on several very bad early 1970s police procedurals in a desperate attempt to establish street cred. Regardless of your opinion on the issue, cannabis is now a legitimate business in most U.S. states. Most have legalized (or, ‘decriminalized’ to use a more politically palatable term) marijuana for medical purposes or recreational use. That means, dear reader, a potentially new business opportunity for insurance products (why am I thinking about chocolate chip cookies all of a sudden …).
However, there’s an added wrinkle to this new business. Actually, there are several. First, it’s new. That means stodgy, old traditional insurers will be more inclined to stay away. Why? Don’t they want new business? Yes – but only a certain kind of business. You see, big insurance companies are actually two companies for the price of one! On one side, are the investment folks. This division is populated by MBAs, CFAs, CIMAs, and all sorts of other professional designations that end in the letter “A.” They do what all investment people do: buy and sell various investments to achieve a return. But they have to coordinate their activities with the other side of the company, which is populated by actuaries. Remember the kids you locked in lockers during gym classes and threw red rubber balls at during the intramural dodgeball? This is where they work, making more money than you’ll probably ever see. They predict losses for the insurance company and develop loss runs for various exposures. They’re actually very good at their jobs. Don’t believe me? Ask them when you’ll die and don’t bet against their answer. But, do take them to the blackjack tables in Vegas – just leave before the casino’s boss finds out.
These two sides talk regularly to align income (from investment portfolio) with expenses (claims). Here’s the kind of conversation they want to have at their regularly scheduled asset/liability meetings. On January 31, the actuaries tell the investment folks, “We should have $150,000 in claims next January.” On February 28, they say, “We were a bit off. It’s actually $163,000 next January.” In March, the number is $178,000. Notice how the numbers, while different, are within a small range? Let’s compare that with the conversation they do not want to hear. In January, the number is still $150,000. But in February’s meeting, the actuaries say, “I have no idea what we were smoking back then, but boy did we screw up big time. It’s actually $275,000. Our bad. Sorry.” Then, in March, the number increases again to $425,000.
Insurers want predictable losses. It makes their job – and more specifically, their investment managers’ job — a whole lot easier. And that’s why this Mary Jane business (sorry, cannabis) is scary to them. It’s new, it’s different, and they have absolutely no idea how to price insurance related to it. So, rather than be innovative, they take the easy way out: they don’t write the risk (suddenly thoughts of cupcakes are running through my head. Anyway … ).
And that’s where captive insurers (a parent company creating a licensed insurer to provide coverage for itself) step in. You see, captive insurers excel at new, different, hard to place risks. It’s one of the primary reasons they started. In the 1960s, there was a company named Ocean Drilling, whose primary business was (here’s a shock) – offshore oil exploration. They could only get insurance from Lloyd’s of London – which is almost always the most expensive in the world. The company finally decided to go into the insurance business themselves because of the cost and their insurers’ inability to price risk (BRB: I keep getting hungry for some reason).
Back to our weed (sorry) cannabis business. What risks do they face? A lot. Let’s start with supply chain disruption. They need a steady supply of goods to sell. If there is a disruption, they lose business. Then there’s employee theft. Here’s the biggest problem the business faces: tea (sorry, I was watching a rerun of Hawaii Five-0 last night and was overcome by my love of Steve McGarrett) is still a drug under federal law. That means banks can’t take deposits from this business. So, there are – literally – piles of cash lying around. I’m a firm believer in the old phase: excessive virtue = insufficient temptation. Next, we have legal liability – paying for an attorney in the event of a loss. These are just some of the risks a captive insurer could underwrite for the parent company (after making a trip to the story to check out the cookie aisle).
So, if you’re thinking about being cool, hip, and just plain forward-thinking, then take a look at using captives for the cannabis business. Marijuana is an industry that is tailor-made for captives. Just do it after you make the late-night run to Taco Bell for their super cheap tacos …