A MATURING MARKET SOARS HIGHER: 2022 CANNABIS INDUSTRY OUTLOOK By Jay Virdi
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he Canadian cannabis market is expected to reach new heights in 2022, with rapid growth pushing the industry toward maturity and growing acceptance across the country. As of this writing, Canadian sales are projected to reach US$4 billion by the end of the year and monthly record sales of $319 million in June 2021. While cannabis sales are exploding, there will be roadblocks, especially when it comes to insurance. Cyber coverage is expected to rise by at least 30% as the number of cyber risks cases explodes and more businesses seek coverage. Cannabis Property-Casualty coverage is also expected to rise 10- 20%, with larger increases for businesses in catastrophe-prone areas. Risk management has never been so important. These trends will drive the industry in the coming year: 1. INSURANCE CAPACITY WILL REMAIN LIMITED We are experiencing a textbook case of a “hard” insurance market: a period when there is a high demand for insurance but a low supply of coverage available. Most carriers providing support to the Canadian cannabis industry are based outside the country. As a result, capacity remains limited, which means some cannabis businesses may not be able to secure coverage. Unfortunately, this means cannabis companies will have to support their own risks longer than necessary. They may need guidance from their broker in coping with the risks of a fast-growing market still in its awkward adolescence. 2. MERGERS AND PARTNERSHIPS WILL LEAD TO GREATER RISKS Despite growing sales, many cannabis operations are unprofitable. They may be looking for a way out, which may include considering acquisition or international partnerships. In fact, Canada had a record number of mergers and acquisitions in the first half of 2021 – more than double the number
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Cannabis Prospect Magazine | February 2022
for the same period in 2020. And while at least two Canadian cannabis organizations have already earned EU Good Manufacturing Process (GMP) certifications, allowing them to participate in the European market, this process may or may not turn around a company’s fortunes. Either solution comes with risk management issues. Organizations looking to merge or partner with other organizations must take proper risk management measures and secure appropriate insurance, including Reps & Warranties (R&W) and Directors & Officers (D&O) coverage. 3. THE EDIBLES MARKET WILL CONTINUE TO GROW In the booming cannabis market, edibles sales topped $100 million in the first year, but that comprised only 4.2% of regulated sales. Edibles remain a huge area of potential growth. As both a cannabis product and a food product, edibles are in an awkward position: producers must follow food manufacturing regulations, while cannabis businesses may lack the experience to make edibles, resulting in manufacturing issues. Many recalls in early 2021 were due to mould or incorrect labeling. At the same time, with regulations severely restricting the levels of THC in edibles, some users are turning away from edibles entirely. Moving into the edibles market shouldn’t be taken lightly. It requires strong risk management to minimize the risks. In the event of a major loss, product recall insurance and general liability can protect cannabis companies as well. 4. “FARM-GATE” SALES WILL CHANGE THE RETAIL MARKET Several provinces are allowing licensed cannabis growers to sell their products directly to consumers, in a move many are calling “farm-gate.” These sales may create an opportunity for smaller growers to attract a larger base of support. Any grower or producer that opens a farm-gate operation should contact a broker to make sure it
has appropriate coverage for a retail outlet, including product recall, cyber and crime insurance. 5. INCREASING CYBERCRIME HITS CANNABIS BUSINESSES HARD Cannabis businesses are a veritable treasure trove when it comes to sensitive customer data. Whether it’s names and contact information or medical information, businesses are up against a rising tide of cyber attacks, with the average data breach costing more than $6 million. Protecting against the risks requires strong risk management protocols as well as proper cyber insurance coverage, no matter what side of the cannabis industry you cover. 6. OUTDOOR CULTIVATION CONTINUES TO CHALLENGE GROWERS With climate change driving unpredictable weather patterns, such as heat waves in the western provinces, as well as flooding and drought across the country, outdoor cannabis cultivation is highly susceptible to failure. Cannabis businesses will be looking for special coverage, beyond the typical property insurance, equipment breakdown insurance or even crop insurance, to protect them from these risks. They may consider parametric insurance, which is designed to kick in after a certain parameter is met. LOOKING AHEAD In 2022, cannabis organizations will have to seek out appropriate coverage to protect them from disaster. They will be looking to their brokers and insurance professionals for guidance and best practices. In a rapidly evolving market, a broker with cannabis industry expertise can identify coverage options, advise on workplace safety and help point operations in the right direction. Jay Virdi is Chief Sales Officer of Hub International’s cannabis specialty practice in the U.S. and Canada.
