More ‘Disruptors’ Head for Insurance

Independent insurance agents have dealt with a variety of competition from the exclusive agent companies, direct writers, affinity programs and more.

When major payroll companies like ADP and Paychex started cross-selling insurance and benefit programs to their payroll customers, a new breed of competition emerged. Independent agents have raised the issue of whether those cross-selling conversations have occurred with appropriately licensed insurance professionals at payroll firms. But the roots of the latest challenge lie in the technology-driven “disruptor” space.

Wikipedia defines a “disruptive innovation” as one “that helps create a new market and value network, and eventually disrupts an existing market and value network (over a few years or decades), displacing an earlier technology. The term is used in business and technology literature to describe innovations that improve a product or service in ways that the market does not expect, typically first by designing for a different set of consumers in a new market and later by lowering prices in the existing market.”

In just a few years, Zenefits, an insurance broker and payroll service provider, has zoomed to an estimated market cap of $4.5 billion based on a $500 capital infusion from a group of investors led by Fidelity Management and private-equity firm TPG earlier in 2015.

What is the particular appeal of Zenefits that has contributed to its stratospheric growth? Accordingly to the Wall Street Journal’s Douglas MacMillan, “Unlike most enterprise software companies, which charge customers a subscription fee, Zenefits gives all its software away for free. The software aims to provide a kind of automated human resources department for small businesses that can’t afford a full-time HR staff, helping them manage hiring, payroll, paid time off, 401(k) and health insurance programs. It generates revenue by acting as an online brokerage for insurance plans, helping users pick between plans and taking a percentage fee each time a user signs up for insurance using its software.”

In fact, Zenefits website states the following: “In addition to serving as your full-service insurance broker, Zenefits offers our free Core HR Platform that gives your team a single place to manage all your human resource needs—payroll, benefits, compliance and more. With over $1 billion in premiums under management, Zenefits is one of the fastest-growing insurance brokers in the United States.”

Now, another disruptor is integrating payroll services with insurance. Last week, Gusto (formerly ZenPayroll) issued a press release announcing it has started to offer both health insurance and workers compensation, combined with payroll services.

“Today, we are also launching two incredible new services: health benefits and workers comp,” wrote cofounders Edward Kim, Tomer London, and Josh Reeves. “These services are fully integrated with payroll, which removes a tremendous amount of unnecessary manual effort for business owners. Most importantly, both employers and employees can now onboard and manage all forms of compensation in one modern product.” The company boasts the support of Google Capital and Kleiner Perkins Caufield & Byers, among others.

In response, some independent agents done in response have formed relationships with payroll service providers that will respect the role and expertise of the independent agent in providing insurance services. Several Big “I” state associations endorse payroll providers.

One payroll service is taking a different approach than some of the disruptors: provides free payroll processing for companies with payrolls of 25 of fewer employees and charges a moderate fee for larger businesses. The initial set-up is free with unlimited, live support, free direct deposit and completed tax forms and filing, as well as free W-2s with reports included. The business model involves paying for services via paid advertising on their website.

What’s different? is not interested in offering insurance. In fact, according to President Michael Rosenberg, they are not interested in accepting advertising from direct writers of insurance—and will put that in writing. “We very much respect the role of local advisors, particularly independent insurance agents,” Rosenberg said. “We see our service as a way for agents to offer (and of course, use for themselves) a value-added benefit to their clients, knowing that we will respect the relationship.”  

Independent agents need to monitor the new breed of insurance disruptors. The Big “I” will continue to do so.

Dave Evans is a certified financial planner and an IA contributor.