“Crime is definitely a big one here. We're very focused on employee dishonesty, and we're also focused on transportation. This is still a large cash business and so we need to have the right vehicles to transport the product and cash. Crime is a big thing that worries insurers in the cannabis industry.”
Insurance has a lot to do with assessing and planning ahead for risk. When it comes to the cannabis industry with federal prohibition, fluid interstate laws, high cost of real estate, and a predominantly cash-based business model, the risks appear to be insurmountable. In this brief interview, Frank Costa breaks down the challenges and critical success factors for insuring the cannabis industry.
Frank Costa is co-founder and Chief Growth Officer of World Insurance, an independent insurance broker serving clients in all 50 states and with roughly 300,000 clients. World Insurance is the 24th largest brokerage in the industry.
As an intro, how did your career path lead you to the cannabis industry?
This is my 35th year in insurance and risk management and I've been an agency owner, Operations Manager, Sales Leader, COO of World Insurance and now World's Chief Growth Officer. At each stage of my career, I've been entrepreneurial and worked to stay ahead of the curve in understanding risk.
Cannabis is another opportunity to break new ground by exploring the unique risks in the industry and engaging with other leaders to identify and deliver solutions.
There are inherent challenges to cannabis because of the legal issues and public perception, but there are a lot of commonalities and similarities between cannabis and other industries we're very familiar with. Agriculture is a good example as it has a lot of crossover with cannabis, but the nature and value of the product are very different. But we can apply what we know about risk from agriculture and other relevant industries to the cannabis industry.
We already have pockets of expertise, and this is the perfect opportunity to get in on the ground floor of an emerging, growing, and evolving business. We're using our knowledge and experience to build a solid foundation to meet the challenges as the cannabis industry grows.
Can you briefly introduce World Insurance and the unique role that this company is playing in moving the cannabis industry forward?
World Insurance is an independent insurance broker serving clients in all 50 states and we have roughly 300,000 clients. We're the 24th largest brokerage in the industry, which gives us the leverage and knowledge to be a leader in cannabis because we have the breadth and scale needed, as well as local resources.
We decided to approach insuring the cannabis industry in a different way than other insurance brokers because the reality is that cannabis won't be mainstream in the industry anytime soon. But World Insurance is already working in all of the relevant markets that the cannabis industry is in, so we're ready to serve all of these clients, no matter what aspect of cannabis a company is working in—growing, dispensaries, manufacturing, transportation, etc.
We also understand that having strategic alliances in any industry is important because we want to be an asset to our clients. We've aligned ourselves with other businesses that have established cannabis practices, including accounting, banking, legal, and HR partners. They're all client-centric and as dedicated as World Insurance is to provide solutions to common problems in the industry.
You serve as the co-founder and Chief Growth Officer of World Insurance, one of the largest insurance brokers in the US. What does this role entail?
My role continues to evolve as World Insurance grows. In the day-to-day, I collaborate with producers and leaders within World to collectively meet our goal of 9% organic growth this year. That's a lot, and the goal has gone up each year, but we're once again going to meet that goal.
World Insurance is known for growth through M&A, but I'm equally proud of what my team has been able to achieve through organic growth. It shows an entrepreneurial spirit and the ability to meet and exceed clients' expectations. So, right now my role is to continue to grow World organically.
You have spearheaded the “World's decision to work with cannabis businesses” in terms of offering insurance to the fledgling industry. Insurance can be complicated, even without mentioning the complicated nature of cannabis regulations. Is there one thing that you can attribute this success to?
We attribute our success to patience in educating our cannabis clients. We've found that clients who engage and want to understand how their insurance operates, and aren't just focused on the price, are the most loyal and interested in partnering with us. We've discovered that identifying the entrepreneurs, investors, and operators who want to truly understand how to protect their business, people and property is a sound way for us to find clients, in cannabis and other industries.
To educate our clients we use checklists and other tools to help with brainstorming. We look at their operations to identify risks and then it's comparatively easy to take the next step. Are there methods to prevent the loss, or how can we mitigate those risks?
We discuss disaster recovery and redundancy. Almost every company is reliant on data, so we talk a lot about data security. Human resources are another important consideration. Protecting a business' people with workers’ compensation and benefits is very important. People make a difference in a successful company, so educating clients means spending a lot of time talking about risks to their people.
What are some of the most significant challenges that are associated with insuring the cannabis industry?
There are a lot of challenges tied to working with the cannabis industry.
First, as an independent broker, we usually have a variety and availability of options for clients. But since there aren't a lot of carriers gravitating to this industry there aren't as many choices as I would like to have to fulfill the insurance requirements for our clients. So that's a challenge because we need to work with a limited number of carriers to secure the coverage needed.
From a risk standpoint, the cannabis industry is amazing. I'll give you a couple of examples. The property market across the country is hardening. Hurricane Ian will have a dramatic ripple effect on the overall property market and the cost of property insurance is going to continue to escalate. Couple that with the nature of this product, which has a higher valuation, and is more susceptible to theft—it's a very attractive product for people to steal—look at the danger surrounding growing operations and greenhouses. The challenge is more pronounced in the cannabis industry just by the nature of the product, so property insurance is a tough one.
Product liability is another challenging area. It can be difficult in any industry, but when you look at the products in the cannabis industry it's even more pronounced. Think about CBD balms, oils and cosmetics, and cannabis-infused beverages. When people think of cannabis they often only consider the raw product, but there are a whole host of cannabis products in the industry that present other product liability implications.
We mentioned crime before. Crime is definitely a big one here. We're very focused on employee dishonesty, and we're also focused on transportation. This is still a large cash business and so we need to have the right vehicles to transport the product and cash. Crime is a big thing that worries insurers in the cannabis industry.
This is all mostly in reference to growers, dispensaries, and suppliers. One more significant challenge out there relates to the money, the investors, and all of the money pouring into the industry. Directors & Officers (D&O) liability is the coverage that protects the investors, and shareholders and protects ownership. It’s a critical coverage for investors, especially in an industry where there are still questions and doubts. So, if they want to protect their investment, they need to have D&O liability coverage and there's a limited marketplace to secure that coverage.
The last one to think about is workers’ compensation. It's statutory and mandatory coverage in most states. People in growing operations have a lot of repetitive motion, they're constantly clipping and so forth. You have people operating vehicles—what about people operating vehicles under the influence of marijuana? It's not illegal in a state like Colorado, but it's a nightmare for the insurance industry. We're still trying to figure out how to balance keeping workers safe and allowing them to use the product at the same time.
Workers comp coverage and benefits for illnesses and injuries will be a real issue. Not just for the cannabis industry, but for the transportation industry, construction industry, and many others.
Has the cannabis industry been receptive to your services?
Investors and owners of established cannabis businesses have been very receptive. For investors, insurance is a non-negotiable for any company that they work with because they understand the value of protecting the businesses, as do owners and leaders who have established cannabis businesses.
Entrepreneurs who are interested in educating themselves about coverage have also been very receptive. We find that startups in any industry are often overwhelmed with details and can view insurance as a nuisance, so it's great when entrepreneurs are able to look long-term to the health of their business and position themselves for future investment.
It's important for startups to understand that they often have the most to lose as people are putting their life savings and that of their loved ones into the business and will lose everything if a Hurricane Ian or other unexpected disaster happens.
Does the cannabis industry have greater insurable risks/liabilities compared to traditional agricultural and manufacturing businesses?
There is an inherent difference in the nature and value of the product, but the agricultural and manufacturing side of the business is an area that the insurance carriers understand. They have established coverage and know the risks for agriculture and manufacturing, so these industries aren't as volatile to them as cannabis.
This means that manufacturers and suppliers will be the most attractive to insurance carriers because they understand this part of the business and have experience in identifying and insuring the risk. Even now, there are more options available to cannabis businesses on the manufacturing side, when it comes to the protection of buildings and equipment. Insuring equipment will likely be how the big carriers dip their toes into the cannabis business.
Another area of difference is finance. Transactions are a basic element for any industry, but for cannabis, there is the added complication of federal regulations. This makes remitting payroll taxes—or paying any taxes—and transferring business to a bank infinitely more difficult. This extends to point of sale.
But people are endlessly creative—especially when it comes to getting paid—and point of sale may be solved by phantom ATMs, which legally allow the transfer of funds for purchasing marijuana.
What's next for World Insurance? And Frank Costa?
For World, we're going to keep on doing what we have been doing—continuing to expand through M&A and organic growth. We predict that we'll be in the top 10 of the largest insurance brokers in the United States in the next few years, and that is our goal.
As for me, I continue to enjoy working and serving clients. I really like doing good things for other people and serving them as an ally. It took me a long time to learn the business, but I've really enjoyed the journey and I want to continue protecting people and their property and making a difference in people's businesses and lives.
It was a great pleasure to have this one-on-one with Frank Costa, the co-founder and Chief Growth Officer of World Insurance. Readers who wish to keep up with the company are more than welcome to visit their website.