RiskGenius Blog

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Zenefits: What does this mean for the future of insurance?

by Clara Stahl | Feb 05, 2016 | Analytics | 2 Comments

 

As part of our value-add to insurance professionals, we keep tabs on the technology companies looking to "disrupt" the traditional business model.  This week we are focusing on Zenefits.  

 

For those unfamiliar with Zenefits, the name may suggest another software solution to an already saturated insurance market. However, after further analysis, there are some key points to make about Zenefits and what they are doing, good or bad, to the market.

 

So why is Zenefits threatening to insurance brokers? It can replace people, and alleviate the cumbersome task of filing, sorting, and submitting forms and administrative paperwork, including insurance-related work. This sounds like a good thing for small business owners and Zenefits, but for insurance brokers this could be a very disruptive innovation in the insurance industry, one that can make their jobs obsolete. Not to worry brokers, Zenefits and other platforms of the same nature have a long way to go before that happens. http://saascribe.com/zenefits-a-lesson-in-disruption/ 

 

Zenefits is a human resources information system that uses a web-based platform to bring all of the HR needs of a business together into one software solution. This means that Zenefits will automate the management of things like pay runs, tax filing, upkeep, health insurance, workers compensation, life and disability, to even 401K and stock options. Zenefits boasts that it has 32,165 plans, 1,018 carriers, and operates in 48 states. Zenefits will also give you data about turnover trends, employee engagement, budget benchmarks, and operational efficiency. https://www.zenefits.com/management/ With a sleek website and freemium model, it has some of us wondering is this the HR solution that small business owners have been looking for? 

 

Since Zenefits’ co-founding in 2013, its small business subscribers have grown to over 10,000. Investors have injected around  $84  $584 million dollars into this rising start-up. Having initial start-up capital is necessary, but where Zenefits actually makes its bottom-line is from the commission that receives from the insurance carrier, similar to other brokers. They also receive a revenue share from payroll companies for bringing them clients.

 

The Affordable Care Act has created an opportunity for Zenefits to grow by providing services that take care of the lengthy forms now required by the government for employers to fill out. They have also found opportunity in the change of legislation in 2014 that no longer requires companies with fewer than 51 employees to have medical underwriting. Meaning that if Zenefits can collect enough data to create rates for customers based on ZIP code, age, plans, carriers, etc. then they can produce quotes instantly instead of taking several days like the average broker does.

http://www.inc.com/magazine/201503/liz-welch/HR-technology-with-benefits.html 

 

Despite Zenefits “unicorn” status, there are still some risks and issues that the company faces. Some risks to the Zenefits model includes the risk that insurance carriers and payroll companies could decrease their commission that they’re willing to pay Zenefits for their business. Another risk could be that another player enters the market with a better solution, and one already has. Meet Gusto, the new human resources and insurance seller in the market, with a valuation close to a billion, and over 25,000 in small business subscribers. http://fortune.com/2015/12/22/zenefits-rival-gusto-unicorn/ 

 

Another main argument against the implementation of software platforms such as Zenefits in the insurance market, is that an online platform may not be able to provide the same advice, guidance, and relationship-building as one would normally get from a human insurance broker who has time to learn the business of the client, and to build a personal relationship with.

http://www.benefitspro.com/2015/04/08/5-flaws-to-a-zenefits-approach?t=core-group&slreturn=1453584553&page=4 

 

Zenefits has also recently run into some trouble with meeting revenue targets and recent HR claims filed against them. Due to the issues with profitability, Zenefits has been in a hiring freeze, and recently cut salaries of some employees. Zenefits had origionally projected $100 million in revenue by January, 2016, but they haven’t reached that target. http://www.wsj.com/articles/highly-valued-startup-zenefits-runs-into-turbulence-1447375220 In September, Zenefits took another hit by Fidelity Investments, who devalued them to $2.34 billion, down from the original $4.5 billion placed on them in May.

http://www.marketwatch.com/story/zenefits-is-latest-unicorn-to-reportedly-hit-rough-patch-2015-11-12 

 

Zenefits is also under scrutiny for claims that they have employees who have been selling insurance policies without proper licenses. End-users were also experiencing software errors, around the time of the HR accusations and licensing accusations. http://fortune.com/2015/12/04/zenefits-hr-issue/ Many reported “bugs” with the software have resulted in a slew of unhappy customers. Employees have grown to 1,640, but have failed to reach the anticipated 2,400 in January of this year.

 

Some of these issues have been named by some as “growing pains”, something that most high-growth companies experience. Others have attributed these problems to the start of a decline in Zenefits’ future growth and profits. The future for Zenefits is still unsure at this point. However, one thing is certain, not a perfect solution is available yet for the problem of managing these functions for small businesses, especially insurance brokerage. For now, insurance brokers and agents are still very much needed, and hopefully a solution will be produced in the future to make back-end processing easier for them.