The recent Bermuda Captive Conference highlighted the significant interest cannabis companies are showing in using captives to solve a vexing insurance problem — the difficulty of obtaining cannabis coverage in the commercial marketplace. While captives can be domiciled in a large number of locations, Bermuda has traditionally been at the top of the list (followed by the Cayman Islands, and then Vermont, Utah and Delaware domestically.)
At the conference, speakers focused on the rationale for setting up a cannabis captive program in Bermuda. The country is an attractive destination as the Bermuda Monetary Authority is in support of cannabis insurance vehicles (providing they are federally legal.) Until the SAFE Banking Act and the CLAIM Act now going through Congress become law, there are still major hurdles in getting a bank account or credit line in the U.S. Even when this legislation passes, the major banks will likely take their time entering the market, while the large insurers will move slowly until there is adequate loss data they can leverage.
As a form of self-insurance, captives can be used for a variety of insurance purposes. While some companies start with captives to furnish Directors’ and Officers’ (D&O) liability coverage, this can be short-sighted as cannabis companies need protection from additional risks. Captive solutions can be created to provide professional liability, product liability, excess liability, business interruption, and other broad form coverages as well.
Three important points were made by members of the conference panel:
- A captive should be considered as part of an overall corporate risk strategy, not viewed as a separate entity.
- Captives can provide flexible options for coverage of risks for which insurance is either unavailable or exorbitantly priced, and
- Any gaps in a company’s insurance coverage can be effectively plugged by a captive, with reinsurance used to manage risk tolerance.
Conference speakers also noted the rise of a popular new option for smaller-sized companies, “Rent-a-Captive.” This is an arrangement where a captive insurer “rents” its facilities to another unrelated organization, usually a company that would not pay enough in premiums to warrant a captive of its own. Under this structure, a company can take advantage of the benefits captives offer without having to make what could be a crippling financial commitment.