Cannabis is a Schedule II controlled substance.

As a large cannabis business that works all along the value chain and across multiple states, Highlight Cannabis has navigated a vast range of operational complexities and risks through the years. Now, however, Stephen and his company are facing another looming business hurdle: responding and adapting to the federal government’s recent decision to move cannabis to a Schedule II substance. 

Rescheduling Cannabis to a Schedule II Substance

On the surface, moving cannabis to a Schedule II classification seems like a step forward for the industry—and in some ways it is. While under the designation of a Schedule I controlled substance, cannabis sat alongside substances like heroin—all considered by the federal government to have a high potential for abuse and no acknowledged medical use. As a Schedule II substance, cannabis is still considered a controlled substance, but it has greater opportunities for research and study. It also will be much easier for the medical community to offer and prescribe it to patients. 

However, this will all be done under the umbrella of federal regulation.

Now the federal government wants all products to undergo rigorous testing and FDA approvals. Highlight, and cannabis businesses across the nation, are wondering what to do next, since the products currently on their shelves doesn’t meet these newly-announced standards and requirements. This puts existing cannabis businesses, from the small mom-and-pop farms or shops to the labs, growers, manufacturers, and large multistate operators like Highlight Cannabis, in a precarious position that threatens their business.

Is this Dooms Day for the Existing Cannabis Market?

In the Attorney General and Secretary of Health of Human Services joint announcement about the decision, existing cannabis businesses will be given several years of runway for this new change to go into effect—and it appears the government is attempting to handle the medical and recreational markets differently. Though their intention is to ultimately regulate the entire cannabis industry, they’re choosing to turn their attention to the medical market first and allow states to continue to manage the recreational side, as they have in the past.

For businesses that operate exclusively in the medical market—growers, manufacturers, dispensaries, labs—this feels like a death sentence. Some may try to pivot to the recreational side, hoping the government will allow states to continue regulating that market. Others wonder if it’s better to seek acquisition by one of the large, national pharmaceutical companies that have been waiting for the opportunity to operate in a government-sanctioned framework.

An even bigger fear for many medical businesses is whether there’s a chance they’ll be forced to pull products off their shelves and out of inventory or risk a federal raid that forcibly seizes inventory. Government action is excluded from most insurance policies, meaning in a situation like this, they will have little to no recourse for financial recovery.

Although medical cannabis businesses are feeling the changes of the recent federal legislation most acutely, the recreational market isn’t immune. Many on the recreational side worry that it’s only a matter of time before the federal government steps in to impose regulation on them as well.

The Future is Hazy

Highlight Cannabis, like all other cannabis operations, are left reeling, as they work to figure out their next move. What will happen to all the existing products on their shelves? Is there a chance they’ll get raided by federal law enforcement if they remain open? How will they be able to compete with the large pharmaceutical companies entering their space? Should they try to pivot out of the medical market and into recreational only to give themselves more runway?

Serving an Industry Plagued with Uncertainty

In response to cannabis rescheduling, the cannabis insurance space is seeing major shake-ups, as well.

For some businesses, securing insurance may become even more challenging than it has been in years past. If concern over government retribution continues to mount, carriers that were once willing to offer insurance to cannabis companies may no longer consider it worth the risk and pull back capacity.

That said, there will also be carriers and companies that view rescheduling as an opportunity to enter the market.

Influx of New Insurance Companies to the Regulated Market

Now that the federal government has sanctioned cannabis for approved medical use, the admitted markets will likely respond by offering products for medical operations. Large insurance companies that already serve big pharma companies have been silently preparing in the background, positioning themselves to step into the cannabis market when the time is right. Now that there is a legal avenue for cannabis, the big hurdle that’s kept many large insurance players out of the game is eliminated.

Despite their reach and scale, however, these larger insurance companies will have a steep learning curve as they learn to navigate the cannabis space. Legacy insurance companies will, to some extent, have an advantage over these new market entrants, due to years of cannabis-related experience. However, they’ll be forced to relearn and adapt to this shift in legislation. Those who do that well will rise to the top as insurers of choice.

Changes in What’s Offered and Available

With any market change, insurance adapts to offer products that meet current demand and need. For example, with the medical community able to more freely recommend and prescribe cannabis to patients, there’s an increase in demand for professional lines and medical-related insurance for medical professionals.

Property insurance will also see some unique situations and circumstances from their insureds. Cannabis facilities are designed and built with a very specific, narrow purpose that doesn’t apply broadly outside the cannabis industry. If rescheduling forces existing cannabis operations to close, they may not be particularly attractive real estate investments to anyone outside of the cannabis industry. This could mean a lot of buildings and properties being left vacant and moving from operating policies to vacant insurance policies.

Insuring a Risky Business

A world where cannabis is rescheduled to a Schedule II substance provides some federal legitimacy to the market, yet the tight restrictions it imposes severely limits the industry as a whole. More than ever, cannabis operators will need the support and guidance of their longstanding insurance partners to help create proper risk management plans and navigate the shifting landscape.