In late May 2015, a memo went out from the head of Lloyd's of London to itssyndicates advising all underwriters that, effective immediately,no new marijuana-related business was to be written and none was tobe renewed.

The reason? Lloyd's no longer wants to write this business untilcannabis has been legalized at the federal level.

The decision sent shockwaves through the insurance industry, aswell as the ever-growing cannabis industry across the country. Witha majority of the industry insured by Lloyd's, there are sure to belong-term effects on not just the marijuana insurance industry, butthe marijuana trade itself.

As this insurance behemoth exits the arena, what can insurancebrokers and insureds expect over the next few years?

1. Prices will go up

Lloyd's of London was one of the first players in the medicalmarijuana insurance industry. As such it had the lion's share ofthe market with over 50% of all policies in the industry placedthrough their syndicates.

Many felt that the policies written by Lloyd's were underpriced,which created stiff competition with other insurers looking to gaina foothold in the industry. The lack of a large, low-costrival allows these other companies to determine their own fairpricing, which is sure to drive up the cost of every policy in thenext one to two years, possibly doubling the price of somepolicies.

2. Capacity will become an issue

In the next 12 months all of the medical marijuana industrypolicies written by Lloyd's will be non-renewed, leaving an untoldnumber of insureds looking for new coverage. This will be anexciting time for insurers looking for new business, but it willcreate capacity issues.

Insurance carriers will need to figure out how to budget for newstaff and facilities to handle the large influx of new insuredsover a relatively short period of time. In the meantime, they maybe slow to respond to quote requests. This will create morestringent underwriting guidelines.

With several months to go before reinsurance treaties arerenegotiated, many carriers may not have the capacity to add thehundreds of policies that will be non-renewed by Lloyd's before theend of the year. Getting accounts out into the marketplace wellbefore nonrenewal is a must.

Photo: Atomazul/Shutterstock

3. Underwriting will become more stringent

As with any other hardening market, the upper hand shifts fromthe insured to the insurer. Underwriting requirements will becomemore stringent with insurance carriers focusing on those thingsthat will allow them to cherry-pick the best accounts due to bothselection and capacity. These requirements may include:

• Security systems
• Financial stability (financial reports may be required)
• Background checks for owners
• Background checks for employees
• Strict compliance with all applicable state laws

While even the most legal of medical cannabis operations may besubject to Drug Enforcement Agency (DEA) raids, the insureds whoare most above board in their operations may be less of a target,making them more desirable clients for the insurance companies.

4. New carriers will enter the marketplace

With Lloyd's on the sidelines of a market they once dominated,new carriers may decide to enter the industry. Fair pricing andless competition will be more attractive to newcomers who may havebeen looking to enter the cannabis insurance business.

Retail may not be the only place we see newcomers to theindustry. With reinsurance treaties being negotiated at year end,new players may enter the market on the reinsurance side. It isalso unclear whether Lloyd's will be pulling their reinsurancecontracts for marijuana insurers as well, but that could open thedoor for new reinsurers to get in the game and for current insurersto increase their capacity.

5. Marijuana will become legal at the federallevel

In December 2014, Congress included language in the budget bill that reduced the U.S. Department of Justice'sauthority to use funds to raid medical marijuana facilities instates where such facilities have been made legal. Thisnon-enforcement also extended to funds produced by medicalmarijuana facilities being implicated by anti-money-launderinglaws.

DEA raids are certainly a concern for any insurer, since theystand to lose the business when the facility they are insuring israided and ultimately shut down. However, this “moratorium” onenforcement only extends to medical marijuana facilities, notrecreational marijuana facilities.

Lloyd's exits the marketplace as 23 states and the District of Columbia have all passedlegislation legalizing the use of marijuana medically and/orrecreationally. Other states have bills currently making their waythrough the state legislative branches over the next severalyears.

Public opinion continues to sway towards legalization, even asthe federal government puts pressure on banks and insurancecompanies to stop transacting with marijuana. What happens when themajority of states have legalized medical marijuana? It is the hopeof the cannabis industry that this will pressure the federalgovernment into legalization.

Federal legalization may be years down the road, but the impactof the Lloyd's decision will be felt immediately by other insurersand insureds in the marijuana industry.

Galen Hayes is president of Hayes Insurance.Hayes has insurance carriers that can handle every aspect ofmarijuanainsurance including, but not limited to: dispensaries,cannabis growing operations, product manufacturers, landlords,testing labs, warehouse and delivery operations and cargotransport.