By: Jeremy Colombik, CPA – Emerald Risk Solutions & Jeff Kleid – Elite Risk
Very few people have a clear understanding of exactly what Hemp is or does. In some sense it has become as ubiquitous as that movie “My Big Fat Greek Wedding” where the father sprays Windex on everything that ails you as a solution. Well interestingly Hemp has that affect as well.
Since Hemp became part of the legal landscape across the country with the signing of the 2018 farm bill, Hemp has been fast tracked to become a unique commodity. As it is from the Cannabis plant, Hemp derived CBD has become all the rage. You can’t enter a room, have a phone call, or listen to the radio without a miracle claim of its benefits. At the same time, Hemp is also considered a very strong fiber, and has approximately 50,000 uses with everything from simple clothing alternatives to Hempcrete, Bioplastics and flooring. Since there are literally millions of acres of land in the US that are perfect for either Hemp CBD, other Cannabinoids or fiber it is truly a new economy all to itself.
So, now that we have some background, how does that tie into specialty insurance or Captive insurance? Well, the short answer is that with all those uses, and especially the Cannabinoid or CBD side, there are plenty of insurable issues that can happen along the way, that may or may not be available to all on the open market. Although Hemp is part of the Cannabis family, while on the one hand it is federally legal unlike its marijuana-based counterpart, it is also not regulated by its counterpart. So, this has caused multiple struggles to insure this side of the plant. For instance, those of us on the front lines working with clients in the Hemp and Cannabis space understand the exposures from seed to sale, but the few insurance companies that are currently in the space are limited in the dollar limits of protection they can offer, limited on the type of coverage they are offering, and most importantly didn’t actually develop guidelines for the Hemp space, because they were so focused on the THC side of the Cannabis plant.
Besides the limitations, one of the biggest things that makes the hybrid between traditional specialty insurance placement and a Captive easier is that the rates in the various directions of coverage are so high. This is because the industry has not found a true bottom or a top to its pricing. Starting at the seeds, the prices between seeds can be 1000% different, based on the type, strain, capabilities, etc. At the same time, someone might have a contract to produce biomass, distillate or isolate out of Hemp, and a regulatory statute could and has been set to limit what the end user does with the product they already bought.
There was, and is, a need for investors, farmers, and others seeking to get into the Hemp space a need to protect their investment with which an insurance policy can accomplish that. Originally, farmers were seeking crop insurance through the federal crop insurance program which is available but very limited. First and foremost, the coverage was only available to be purchased for a limited time before the upcoming 2020 gets started. Beyond that, coverage has only been offered in specific states, and the farmer had to have at least a year of already growing Hemp. Which in itself is a challenge because most farmers didn’t jump right in last year once Hemp became legal, but rather did their due diligence and planned for this season. The ones that were able to obtain coverage quickly learned that the amount of coverage was quite limiting, and in most cases doesn’t even cover the cost to plant and harvest the hemp. While it was definitely a good try, Hemp is going to be a different animal to insure for quite some time, probably at least a few seasons ahead. Not only is the industry still in its infancy, there aren’t enough studies out there to truly see how this plant will disrupt both the alternative medicine space and fiber space. Which will keep pricing and coverage a fluctuating, hands on must be in control of its needs process. That in itself lends great credence to why the Captive hybrid makes sense for Hemp.
Also, it is not just about crop insurance in the hemp space. There are other insurance needs that are not readily available in the traditional market such as a commercial legal defense or a regulatory investigation. Last year a shipment of hemp was traveling over state lines, had all of the necessary documentation and paperwork, but the drivers still got arrested by police and their hemp crop was confiscated because the police believe the drivers were transporting an illegal substance and it smelled like marijuana. A commercial legal and/or regulatory investigation policy would have offered the protection needed for this which is available in a Captive. In a captive insurance company, generally the insured owns and controls the insurance company. Now the client can participate in the underwriting profits instead of just the traditional carrier as well as having risk covered that are not available from the traditional carrier. Also, with a captive, the policies can be more tailored to the business which include having less exclusions and gaps that are common in traditional policies.
Now there is a strong way to combine the traditional insurance world with that of Captives to help the clients cut their costs, by taking deductibles on things like Crop insurance, stock throughputs, and product liability. Then filling in that deductible with a Captive alternative that allows for dollar one protection. By the way, don’t think the above three coverages are readily available for everyone at every time they are needed. There are quite a few people out there selling insurance products into this space who quite frankly are not doing us or the industry any favors.
There is definitely a buyer beware mentality out there from agents. The goal is to give agents the tools to best explain the pros and cons of what is out there for their clients. It is all about management of expectations.
On the actual end user side of the Hemp space, just as in THC Cannabis, agents should really look behind the curtain to prepare their client(s) for a disruption to their supply chain, be careful and vigilant working with a fulfillment company, when purchasing biomass, and when transferring ownership of their products. It sounds simple enough, but realize that none of this supposed infrastructure, knowledge and quite frankly almost none of these companies existed.
As Hemp continues to get more seasoned as the years pass, more clarity will come with this on regulation, insurance and other factors. During this time, it is important to have the knowledge from agents to get the right protection in place to protect the hemp investment. A true hybrid policy between traditional and captive insurance is the solution.
Jeremy Colombik, CPA, is president of Emerald Risk Solutions (ERS) as well as managing partner of Management Services International (MSI), which currently manages over 100 businesses that are utilizing a captive insurance structure. He formed Emerald Risk Solutions in 2018 to be at the forefront of the emerging hemp industry. Through ERS, captive insurance is available “from seed to sale” for hemp growers and covers crop losses, regulatory investigation, drone, stock throughput, and inland transit, as well as other risks.
Jeff Kleid is an insurance broker and founder of Elite Risk Insurance. He launched Elite Risk in 2008 to continue raising the standard of insurance coverage provided to the sports, fitness, entertainment, and technology industries. In 2018, Mr. Kleid and his team found that climate, entertainment, and technology lined up perfectly with the emerging cannabis and hemp community. He has developed and implemented multiple insurance products including the first of its kind, truly bespoke hemp crop insurance solution.