Can the HR benefits broker survive after another hefty fine?
Insurtech startup Zenefits has been fined $1.2 million by the New York State Department of Financial Services (DFS). The fine came after Zenefits reported its employees sold insurance without the proper licenses.
The San Francisco-based HR software provider was also cited for inadequate compliance oversight and failure to properly train employees, according to a DFS statement. The action follows Zenefits’ internal investigation, which found that between 2014 and 2015, its employees solicited, negotiated, and sold insurance policies without a New York State license. Zenefits also failed to meet the state’s insurance compliance standards due to lax record-keeping procedures.
The DFS statement notes that by 2016, all Zenefits employees held the required New York State license to sell insurance. Under its agreement with DFS, all current and future Zenefits employees will receive the required 52 hours of insurance broker training. The company will also send documentation of that training to DFS.
The Second Multi-Million Dollar Mistake
The New York State fine was the latest in a string of regulatory actions taken against the company. Last year, California’s Department of Insurance handed down a $7 million fine for licensing violations stemming from a software program developed by Zenefits’ former CEO Parker Conrad. The program enabled employees to sidestep prelicensing requirements. The company reportedly paid lesser fines in several other states, including Tennessee, Arizona, Minnesota, and Texas.
Zenefits’ bottom line took a significant hit from the fines. The Wall Street Journal reported some of Zenefits’ investors, who recently poured some $600 million into the company, forced the company to reduce its valuation from $4.5 billion to $2 billion in June of last year. This caused layoffs of roughly 250 positions — about 17% of its workforce.
The turmoil ultimately reached the boardroom, where Conrad was ousted as CEO and replaced by former Yammer and PayPal executive David Sacks in February of 2016. In addition, the board of directors is now two-thirds occupied by directors not affiliated with management or the former CEO.
Then, Sacks abruptly stepped down as CEO after less than a year in the position, being replaced in February by Jay Fulcher. Soon after coming aboard, Fulcher announced another round of layoffs, eliminating 430 positions and leaving the company with a total headcount of about 500, Reuters reported.
Insurtech Startups Under Scrutiny
The group benefits marketplace has been besieged in recent years by increased rates, lower commissions and technological disruptors like Zenefits. These developments have pushed brokers to implement new technologies to keep pace. With the right tech tools incorporating predictive analyses, agents can offer companies group health packages tailored to their specific workforce risks. And like Zenefits, companies expect benefit brokers to use technology to automate the signup process.
But as the Zenefits’ experience shows, state regulators have put insurtech startups under a watchful eye. Zenefits based its revenue model on an innovative software program, but it still needed to have licensed agents sell its insurance policies. New York State and California didn’t cite Zenefits for its use of technology (which insurers and even regulators support in an effort to streamline the industry). The company ran afoul of insurance laws. What the regulators said, in essence, is that no technology, however advanced, can replace a licensed agent that safeguards consumers from fraudulent policies.