UNIVERSITY report markers. The combined marks determine whether

Faculty of Mathematics

Marijuana – Emerging Risk in Canadian Insurance Market

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XL Specialty Insurance Company

Actuarial Team

Toronto, Ontario, Canada

Bona Zhang
2B Actuarial Science/Finance Option
Dec 12, 2017


To:                   Ryan Ho

From:               Bona

Date:               December 12, 2017

Re:                   Work Report: Marijuana – Emerging Risk in Canadian Insurance Market

we previously discussed, “Marijuana – Emerging Risk in Canadian Insurance
Market,” is the report I prepared for my 2B work report and for the Actuarial
Team. This report, the second of four work reports that the Co-operative
Education Program requires that I successfully
complete as part of my BMath Co-op degree requirements.

The Actuarial Team not only provides detailed actuarial pricing
analysis for property, casualty, auto, and construction lines of business, but
also conducts reports on various aspects of business. My job as an actuarial
intern required my assist in pricing accounts, writing reports, and holding
meetings with underwriters. This report is an in-depth study of the emerging
marijuana risk in Canadian insurance market.

The Faculty of Mathematics requests that you evaluate this report on
both topic and technical content/analysis. With your evaluation, the report
will be submitted to the Math Undergrad Office for evaluation on campus by
qualified work report markers. The combined marks determine whether the report
will receive credit and whether it will be considered for an award.

Thank you for your assistance in preparing this report.


Student Bona Zhang





Table of Contents
Executive Summary
1.0 Introduction
2.0  Analysis
Analysis of Medical Marijuana
Analysis of Recreational Marijuana
3.0 Conclusion
4.0 Recommendations
5.0 References
6.0 Acknowledgements
7.0 Appendix


In the second and third quarters of 2017, XL
Catlin Emerging Risk Task Force has monitored several emerging risks in Canadian
insurance market which have potential impacts on the company’s product
offerings and business operations. From these risks, I chose Marijuana as the
topic of the report enclosed.

This report will provide analysis of the background, claim history and potential trends in the future Canadian insurance market resulting from marijuana.
In addition to giving insurers an overall view of the possible impact of medical
and recreational marijuana, the report also provides some advice for insurers,
which can be found in the recommendation section at the end of the report.

This report can not only be treated as an
information base, but also a useful tool for insurers to make effective
emerging risk management, which is able to reduce uncertainty, increase
stakeholder confidence and attempt to diminish the volatility of business





Emerging risks are new and unforeseen risks that are perceived to
be significant but which may not be fully known or allowed for in insurance
terms and conditions, pricing, reserving or capital setting, according to Lloyd’s
(Susan K. Woerner, 2011). In the contemporary world, the ongoing technological
revolution is continuously creating new risks as well as business opportunities
for insurers and their customers. In the meantime, it can be essential for risk
managers, regulators, and insurers to identify and assessing emerging risks
that may affect the ever-changing industry.

One of the emerging risks in Canadian
insurance market, marijuana, also known as Cannabis, is a psychoactive drug
derived from the Cannabis plant intended for medical or recreational uses
(Cannabis (drug), 2017). In Canada, approximately 5 million adults use cannabis
at least once a month. With increasing positive attitudes towards legalization
of marijuana, issues associated
with property policies, liability coverage, and auto insurance have raised in
Canadian insurance industry.








2.1 Analysis of Medical

On the medical side, marijuana, also known as
marihuana, can be useful in seizure disorders, cancer symptoms, chronic pain,
stress, depression, etc. In order to get marijuana for medical uses, a
diagnosis proof is required and must be approved by Health Canada. However, the
Canadian Government has introduced the Marijuana Access Program (the “Program”)
since 2011. The program permits eligible persons who are prescribed marijuana
to obtain an authorization which allows them to produce marijuana themselves,
or via a designated person. Therefore, the Program has allowed production of
marijuana in a dwelling-place, which caused the number of authorized people to
possess, and often grow marijuana raised from fewer than 100 to nearly 40,000
in 2014. The rapid expansion in having home-based grow-operations (“Grow-ops”) in
residential areas has rightly caused concerns to insurance companies, who write
property risks in Canada, including:

due to grow-ops

In order to convert a single family dwelling
into a grow-op, upgrade of the building including ventilation systems
installation, electrical installation, and separation of environmentally
dissimilar interior spaces are required. With an unlikely viability of the
conversion, potential damages will arise. According to the professionals from Marijuana
Grow Operations report, failure of converting a house to a proper grow-op can

indoor air quality due to contaminants used and produced in growing marijuana;

number of mold and bacteria caused by high-humid environment;

of structural components of dwelling systems as a result of mold; and

levels of carbon dioxide.

Despite the damages caused from a professional
view, failing to meet the requirements of a grow-op may also result in increased
fire and electrical risks, targeted home invasion and theft of marijuana, and
exposure of marijuana towards children, either intentionally or by accident.

issues due to grow-ops

When an insurer writes a risk related to a
marijuana grow-op in the insured’s home, there are several factors need to be
taken into consideration. According to the professionals from Marijuana Grow
Operations report, potential coverage issues caused by marijuana grow-ops are:

Misrepresentation – This refers to the situation where the insureds fail to
inform the insurer the fact that they are having grow-ops at the time of the
placement of coverage. Therefore, due to lack of information, the insurer may
not take the grow-op risks into consideration when doing the analysis, which may
result in a potential risk in the future. However, the insured may have the
right to void the claim in this case, if corresponding regulation applies.

change in Risk – This occurs when it is known that the insured is having a
grow-op at the time of the coverage placement, while the insured fails to tell
the insurer the rising risk above what is premised. The insured can also void
the claim if respective regulation is applicable.

due to innocent insureds – Some Canadian provinces (British Columbia, Alberta,
Manitoba) provide legislation that protects the insureds in the household with
no knowledge of the illegal grow operations. Hence, when a claim happens, rather
than excluding the entire loss by the insurer like the former two cases, the
innocent insured can still have the right to seek a reimbursement.

After viewing all the potential damages and
coverage issues related to grow-ops, some real-world property claim cases can
provide a better idea of the possible. In one case involving Gore Mutual
Insurance, the insured’s home was totally destroyed by an explosion resulting
from the tenant’s illegal marijuana production. The Ontario Court found that the
exclusion for damage to dwellings used in processing marijuana applied, so it
dismissed the insured’s property loss claim under a homeowner’s policy (Jason
Contant, 2017). In another case involving TD Insurance, the insureds were
compensated by $1,000 each from their 11 stolen medical-use marijuana. The
third case is related to a fire claim. The Mutual Fire Insurance Company of
British Columbia treated its insured’s policy to be voided since it is not
informed that the insured is
operating a marijuana grow-op in an attached living area. However, the Supreme
Court of British Columbia claimed that there is no misrepresentation of
material change by the plaintiff since the fire claim is related to the
greenhouse business operated by the insured.

2.2 Analysis of Recreational

On the recreational side, the usage of
marijuana is more self-explanatory – people do not need any proof in order to
use it. According to Statistics Canada and a 2015 Forum Research poll, almost 6
out of 10 Canadians are agreed of recreational marijuana legalization. With
softer attitudes towards recreational marijuana among people, the Canadian
government is aimed to legalize the recreational use of marijuana for people
above 18-year-old throughout the country by July 2018, fulfilling an election
promise by Prime Minister Justin Trudeau.

Taking the U.S. as an example – since the legalization of
recreational marijuana in Colorado, Washington, and Oregon, they have experienced
a big increase in fatal car crashes compared to neighboring states. In
Washington State, drivers in fatal crashes who tested positive for marijuana
has doubled from 8 percent in 2013 to 17 percent in 2014. In Colorado, the
number of drivers included in fatal crashes with a positive marijuana test
result has tripled from 3.4 percent to 12.1 percent between 2005 and 2014
(Pamela Fayerman, 2016). Additionally, the U.S. Highway Loss Data Institute
reported that there has been 3 percent increase in collision claim frequencies
in these three states since recreational marijuana legalization.

On the Canada side, Statistics Canada reported that 2,500
out of 75,000 impaired driving incidents were related to drugs in 2015.
Although it seems like a small number, a large portion of drivers who died in
the crashes had their marijuana tested positive, according to studies. Besides,
2.6 percent Canadians admitted to driving within 2 hours after using marijuana;
5.5 percent of drivers had positive test result for marijuana use; and 16.6 percent
fatally injured drivers tested positive for cannabis, according to studies
between 2000 to 2013 (Joanne Laucius, 2017). Although the legalization in
Canada has not happened yet, we may predict a similar result in respect to the
U.S. example.




In a
conclusion, marijuana will become one of the emerging risks in the future
Canadian insurance market after its legalization on both medical and
recreational sides.

For medical
marijuana, the major concern for insurers can be related to “Grow-operations”.
Grow-ops may not only cause damages such as unsafe air conditions, increasing
number of mold and carbon dioxide, and structural weakening, but also cause
insurance coverage concerns including material misrepresentation, material
change in risk, and innocent insureds.

recreational marijuana, which is expected to be legalized by July 2018, auto
claims can be the main risk for insurers. Although the effect of legalization in
Canada has not been fully recognized yet, U.S.’s example can be useful to
predict the trend – the legalization of recreational marijuana will boost fatal
car crashes as well as auto claim frequencies.








though it will take years for the effects of marijuana legalization to be fully
realized, several possible recommendations to Canadian insurance companies are
provided here according to the predictable trend.

In the first place, the insurance company may need to improve
their terms and wordings to be more suitable to the new risk. Insurers may need
to have contract reviews for new agreements resulting from the legalization.
Besides, with analysis of potential resulted exposure changes, corresponding
regulations might be updated. If necessary, insurers may need to provide insured-specific
wordings to cater to different situations.

the medical side specifically, if
the accidental fire claim is related to an illegal grow operation, the insurer will
have the right to void the claim. However, insurers may not be allowed to do so
in British Columbia, Alberta, or Manitoba, where it does not allow insurers to
do so except under certain specifications. Even though the insurer can void the
claim, special
attention should be paid to provinces including British Columbia, Alberta, and
Manitoba, where there is protective legislation for innocent insureds. In this
case, the insurer should also consider that the insured’s spouse, children, or
parents may be able to receive recovery for their proportionate share of loss. Although
the proportion of each tenant has not been clearly defined yet, it is usually
assumed to be 50 percent ownership each between spouses.

In order to prevent or improve the argument of
“materiality” including both material misrepresentation and material change in
risk, questions about a licensed grow operation should be included in the
application form for the insured. Besides, engineers or other experts may be
sent out to randomly chosen households to check whether there is a
misrepresentation or change in the material.