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Health-insurance broker Zenefits hits more turbulence

February 2016

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Zenefits, a San Francisco-based software startup recently valued at a whopping USD 4.5 billion, then revalued down to USD 2.3 billion, said in February 2016 it had replaced founder and CEO Parker Conrad with its former chief operating officer David Sacks, previously an executive at Yammer and PayPal.

The company provides software for small and medium-sized businesses that automates some of their human resources services, including healthcare benefits, stock options, maternity leave and vacation time.

Zenefits does not charge its clients for its software and its income consists in commissions or broker fees on its clients’ healthcare insurance purchases. Still, the maverick new entrant publicly acknowledged that “many […] internal processes, controls, and actions around compliance have been inadequate”.

Zenefits was criticized for allegedly flouting insurance laws. Recently, it came under investigation in the U.S. states of Washington and California for allegations it let unlicensed brokers sell health coverage; the same may have occurred in five other U.S. states. The company now has hired a chief compliance officer.

Zenefits had positioned itself as a high-tech health insurance broker but dispensed with insurance licenses, sparking a turf war with traditional brokers across the United States. Moreover, insurance regulators argued that giving away its software to businesses while also serving as their insurance broker gives rise to conflicts of interest and is not permitted under existing laws and regulations.

Apart from the issue of its gigantic valuation, mainly a concern for its investors, Zenefits product and cost advantages may be significantly reduced if its software-in-return-for-brokerage package must be unbundled and clients have to pay for the software component as well as insurance fees and commissions. After the cost-cutting actions announced in November 2015 (see our article here), we will follow the forced evolution of Zenefits’ business model as well as the company’s sales and growth trajectory with great interest. After all, the fate of Zenefits is one indicator of how much disruption U.S. insurance distributors and regulators are prepared to tolerate; of the appetite of clients for change in the design and delivery of U.S. healthcare benefits; and finally of VC’s commitment to FinTech / InsurTech.

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