Arizona-domiciled CLIC RRG, Inc. has begun writing premium. CLIC RRG is the first risk retention group formed to serve the cannabis industry and is providing general and product/completed operations liability coverages to growers, retailers, manufacturers, labs, and other business operating in the cannabis industry. Although CLIC RRG is serving an emerging industry, with legal complications, CLIC RRG Founder Chris Payne envisions the group operating like a traditional member driven risk retention group.
CLIC RRG is currently registered to do business in Arizona, California, Colorado, Maryland, Oregon, West Virginia, and Washington. Through the first quarter of 2024, CLIC RRG has written premium in the state of Washington only.
Payne told the Risk Retention Reporter that CLIC RRG currently has a core group of around six medium-sized cannabis groups. These are companies that have put “significant capital into the RRG” and on average have slightly higher premiums.
“Our core members are engaged and involved,” said Payne. “We’re also looking for some smaller members who may not want to put as much capital into the RRG. However, we’re not looking to grow quickly. It’s much more important to get high quality risks and grow slowly. We don’t need a large share of the market to be a successful RRG.”
CLIC RRG has established underwriting, claims, and risk management committees and is currently developing the recruitment and sales process for the risk retention group. Members joining CLIC RRG are required to commit to the RRG for five years.
Like many risk retention groups, CLIC RRG was formed due to lack of availability in the traditional market. While CLIC RRG provides GL coverage, it is not the pain point for members.
“GL is your classic slip and fall coverage. With GL you find out what happened and deal with things quickly and fairly. Minor claims are typical in GL, with some business dispute claims mixed in,” said Payne.
According to Payne, completed operations and product liability are the emerging risks and the line that members have difficulty obtaining coverage for. Payne notes that there are only six or seven markets currently providing completed operations and product liability coverages to the cannabis industry. And when coverage is available, rates are “extraordinary.”
“This is a $40 billion industry, I thought the med mal crisis was bad, but the lack of availability for coverage in this industry is on another level,” said Payne.
Payne notes that the loss ratio for GL and product liability/completed operations in the cannabis industry is very low right now, around 15 to 25 percent, but that is not uncommon for longer tail lines of risk.
“There are real risks in these lines three to five years down the road. Our plan for the RRG is to start developing risk management and storing up capital now for what’s coming down the road. This way premiums contributions by members are not wasted. We want to be a classic risk retention group, and we want to take care of our members,” said Payne. “We also want to follow the model of the physician owned RRG: conservative underwriting and communication with members. When there are issues, we should be ahead of the market, because our members are telling us of those issues as they occur.”
According to Payne, CLIC RRG will be starting with a tight policy and that can be expanded as the risk profiles of the RRG’s members become more established.
Payne also plans on making education a core component of the RRG.
“We need to educate people who are selling cannabis products. As insurance professionals, we know what the pitfalls are. We need to educate these individuals who are new to the c-suite,” said Payne. “These are people who have never been sued before. They don’t know the psychological and financial damage a major lawsuit can have on a business owner. A forty-billion-dollar industry is not going to be overlooked by The Association of Trial Lawyers of America. We want to help make cannabis a responsible business in corporate America.”
Payne stated that to manage these risks members of the cannabis industry need to lean into disclosures and clear packaging. A key emerging risk highlighted by Payne is cannabis induced psychosis in younger users, particularly adolescents, a condition that has been receiving more attention in medical journals.
“If want to run this business correctly, we need to address this issue now. How can we deliver this product to adults responsibly,” said Payne.
According to reporting by KRON 4, STIIIZY, one of the largest cannabis companies in the country, is being sued in case that alleges that their high-potency cannabis products are marketed to youth and such products are connected to higher rates of cannabis induced psychosis in younger users.
Another case mentioned by Payne as a case study was Kushy Punch. Kushy Punch was fined $128 million by the state of California “for illegally producing millions of cannabis gummies,” according to reporting by SFGate. The article stated that Kushy Punch had a license to produce cannabis products in Chatsworth, California, but was also illegally producing cannabis gummies at a second facility in Canoga Park, California.
“We want to help the cannabis industry understand that compliance isn’t enough. You need great records to show a jury that you behaved in a responsible manner, not just a compliant one,” said Payne.
Despite the need for coverage, cannabis is illegal at the federal level which made the road to CLIC RRG’s formation a long one.
“You need to find a state where cannabis is legal. Then you need to find a bank that will publicly take on that business. The state also needs captive law and RRG capability. The challenge was putting those pieces together.”
Payne also stated that the cannabis industry going through a rough time financially, as cash is tight, and insolvencies are rising. Even so, the business continues to grow and the number of states in which it is legal continues to expand.
“We had a gold rush mentality. There was a lot of money coming into the cannabis space. You had overinvestment. You had people whose background was in the gray market and didn’t have the skills to run a highly regulated business. The cannabis industry is heavily taxed and regulated and unlike other businesses the only deduction available on federal taxes is cost of goods,” said Payne. “Most of these companies haven’t been sued yet. This is a young industry that is growing. There will be shakeouts and consolidation, but the survivors will run a more stable business.”
From a risk point of view, Payne believes CLIC RRG is a business school case of why RRGs are important.
“No one wants to touch the risk, but coverage is needed. The RRG legislation was remarkably farsighted,” said Payne. “RRGs, along with captives, are the self-correcting mechanism for the insurance market. When the traditional market fails to meet the needs of insureds, the RRG and captive market is there.”