We live in exciting times! It seems like every day there is a new HR Technology provider that enters the space, or one that has been around and just reinvents themselves.
The latest is an article I read on Zenefits is confirmation of that. This start up just received 2.1 million in private equity, they are an insurance broker. Zenefits launched out of Y Combinator this winterto remove the friction of setting up and managing group health coverage and payroll by automating the process and bringing it online — for free in California.This article should hit home to all brokers and consultants in this space. Zenefits is executing based on the value proposition we have been talking about for years. Bundle Employee Benefits with a strong benefits admin system and include payroll admin for a “one stop shop”. This cost is about $10-12 PEPM for the total package through a provider. There can obviously be economies of scale that are created with more business. This is where the market is headed, new competitors will pop up and ones like ADP will become more aggressive.
Are you ready?
Since expanding it’s service in April they have signed over 110 clients with employees from 2-100.
Zenefits is essentially a digital insurance broker, meaning that they help startups automate insurance, benefits and payroll but they also get paid a commission by insurance companies each time a company opens a new plan through its system. (just like setting up a private exchange) Over the next two years, as Obamacare goes into effect, the new regulations and provisions mean big changes for health insurance companies and brokers.
These health players are not only being forced to move operations online but will also see the amount of commissions they can take drop — among other things. Many health insurance brokers are going to drop their small-group clients to focus on bigger-ticket customers as a result — and, as premiums could go up for businesses — Zenefits could stand to benefit big-time by offering their services for free. Plus, having someone who’s intimately familiar with the complex and nuanced provisions and regulations in Obamacare.
Maverick Capital is also familiar with the healthcare and health insurance industries itself, having backed some of the bigger startups and players in the market, like OneMedical, Castlight Health and SeaChange Health, for example.
With the new capital under its belt, Zenefits has expanded its team to 12 and will look to add more in the coming year. Because the company is considered a broker, it is paid a commission from insurance companies for each new employee and employee added (every month), which is great for its bottom line. But this also requires that it be approved by the government on a state-to-state basis. Currently, regulations limit it (and others like it) to a few states.
But with the changes Obamacare will bring, Conrad expects that digital insurance brokers of its ilk will be allowed to expand to more states beginning in January, at which point, Zenefits will look to move quickly beyond California and New York.
In the meantime, Conrad tells us that, according to BenefitMail, the company has already vaulted into the top 5 percent of insurance brokers (in terms of number of clients) in California, primarily as a result of new company submissions to Blue Cross — not bad for a startup five months from launch.
For those unfamiliar, Zenefits has been growing fast in California by turning a paper-heavy process into a digital one, allowing users to create new plans, while serving up quotes for group coverage across health, dental and vision insurance. The company’s system makes it easier for companies hiring new employees to add coverage for each employee, or, if a company fires someone (or they leave), they can click a button to remove their coverage and take them off the payroll, while starting them on COBRA coverage.
It works for companies regardless of whether they don’t have existing coverage or already are set up, syncing employee coverage data and taking over as your insurance broker for those in the latter camp. The company also recently added payroll services, so that startups and small businesses can just tell Zenefits about a new hire and give them the employee’s information, at which point Zenefits will take care of generating offer letters, IP agreements, onboarding details and then add them to its payroll system. They can also do the same for that employee’s benefits.
As part of its payroll services, Zenefits also sets up deductions employees pay for health insurance and other benefits, which employers would usually have to set up themselves. This is a pain, because salary and pricing can be different for each employee and whenever deductions change (which happens a lot when employees move, get married and so on), the price changes. Traditionally, the price of deductions change every 10 years, but with Obamacare, this will happen every year. This could be a huge boon for Zenefits, as it takes care of this stuff for startups and small businesses, who would be seeing a lot more paperwork as a result.
Furthermore, while services like Zenefits may seem familiar or not particularly disruptive to some, it’s hard to over-state just how old-school (and offline) most of the big, old school health insurance brokers are in the U.S. Some of them are multi-billion-dollar market cap companies, but may have little or no software or online-based solutions for their customers. So many startups and founder say “we’re disrupting and old offline industry” to get you excited about your company, and in a lot of cases that’s only half-true.
Health insurance brokerage is definitely one of those industries that qualifies as ripe for disruption thanks to its archaic procedures, practices and infrastructure. Many are aware of the changes that are coming, but they’re limited in how quickly they can react by responsibilities to shareholders, quarterly earnings and so on. Easier to preserve and protect the current state of things than re-build from the ground up. Zenefits won’t be the only one to benefit — many new companies are going to spring up in this space — but it’s definitely off to a good start.
As Inkling CEO Matt MacInniss (who personally invested in this round) told us:
Zenefits has identified a huge opportunity in the shifting landscape of benefits and healthcare among growing companies. Incumbents aren’t going to move as quickly as smaller, nimble companies — and they’re not technologists — so I think there’s a huge opportunity for new digital health insurance brokers to quickly move out front to take the pole position in what’s essentially a new category.