RiskGenius Blog

Insights into our world of Insurance & Technology.

Zenefits Comes Under Fire



If you read my post about Zenefits last week, you probably could sense that I was a bit skeptical of the insurance technology startup that had raised over $500 million at a valuation well over $1 billion.  


Just one week later, I now know why I was skeptical.  


California Department of Insurance Regulators are knocking down Zenefits' door over a program called "The Macro". The program was accessible to some of the employees at Zenefits, and allowed them to complete their online pre-licensing education classes, without actually doing the entire 52 hours required by law. "The Macro" would do this by keeping an individual logged into the course and wouldn't log the person out for inactivity. This program didn't advance someone in their required coursework or quizzes, it just kept the individual logged in. "The Macro" was only used in these pre-licensing classes and did not have any impact on the health insurance broker exam that employees took later in their licensing process. What's worse though, is that sales reps had to sign a certification under penalty of perjury that they had completed the 52 hours required by law. 


In a detailed internal memo written by new CEO David Sacks, Zenefits said that they have already taken corrective action by firing those responsible for creating, distributing, and encouraging the use of this program. Additionally, they are implementing a new retraining program for licensed employees that used Macro to get licensed in the state of California. The memo then goes on to warn that, "any Zenefits employee who commits a licensing violation or does not promptly comply with our remediation steps will result in immediate disciplinary action, up to and including termination." To read the full memo please go here: http://techcrunch.com/2016/02/11/zenefits-under-investigation-in-california/


A result of this failure to spend the required amount of time in pre-licensing classes, some of the company's largest brokers could be facing disqualification in the state of California. Buzzfeed news reported on this improper licensing procedure at Zenefits back in 2015, which launched an internal investigation within the company, that was then handed over to the California Department of Insurance. Zenefits states that they self-reported this issue with "the Macro" to regulators and have ensured their full co-operation in the pending investigation. However, due to Zenefits' failure to meet revenue projections and compliance measures, Parker Conrad has resigned. A lawyer for Sacks (new CEO of Zenefits) also has said that the Macro was created by Conrad because he believed that 52 hours was too long to spend in training. 


"In Washington state, where Zenefits is currently under regulatory scrutiny, 83% of the insurance policies sold or serviced by the company through August 2015 were peddled by employees without necessary state licenses, according to data obtained through a public records request." - (William Alden, Buzzfeed News)

Alden also claims that there is evidence of unlicensed employees selling health insurance dating back to summer of 2014. At that time, they were reporting on the state of Washington examining Zenefits for operating without licenses. Under the laws in Washington, anyone who knowingly sells, solicits, or negotiates insurance without proper state licensing can be punished with a prison sentence of up to 10 years and a civil penalty of up to $25,000 for each violation. Buzzfeed news has reported that they think around 110 policies were handled by employees who lacked a state license at that time and there were 44 state unlicensed employees at the time of these transactions.


The Fallout

Agents must have the proper licensing to do business with insurance companies. Therefore, due to recent findings about licensing issues with Zenefits, it is possible for their agreements with large insurance carriers to be in violation. None has been reported thus far. 


The current restructuring including the appointment of David Sacks as CEO of Zenefits, seems to have generated positive support from Silicon Valley and the VC/start-up world. Many commend the way that Sacks handled the resignation of Conrad, and the new programs implemented into Zenefits to fix licensing issues. One slight qualm that some of us have to this positive response is that David Sacks was COO of Zenefits from December 2014 until just recently. Despite claims of Zenefits turning over a new leaf, one can't help but wonder if you appoint the COO during a time of fraudulent activity to CEO (present-day) to fix the problem, is the problem really going to be solved?