It’s been a tough couple of months for Zenefits.

The Silicon Valley startup’s bold foray into the world of selling health insurance to small businesses—which garnered the three-year-old business a $4.5 billion valuation—screeched to a halt on Feb. 8 when it came to light that many of its agents were unlicensed or not fully licensed in the states where they were selling insurance.

This activity was particularly flagrant in the state of Washington, where unlicensed agents sold 83% of the company’s health insurance deals. Additional evidence pointed to similar violations across seven states.

After a mad scramble and the ousting of then CEO Parker Conrad, Zenefits has been humbly attempting to pick up the pieces. On Feb. 26, the company laid off 250 employees, the same day newly appointed CEO David Sacks published a blog called “A Letter to Zenefits Customers” explaining how the company had changed its stripes and how it would affect customers. Among other important changes, Sacks outlined the appointment of a new chief compliance officer—Josh Stein, a former federal prosecutor—and a new culture of transparency and professionalism that, I think we can guess, didn’t previously exist at Zenefits.

A 70-year history outlines regulatory compliance issues that change frequently on both a federal and state level, which Zenefits failed to acknowledge as a seller of insurance. Bewildering as it may be to any insurance professional, Zenefits failed to accept that the roots of insurance are in contract law, and that rules and regulations are synonymous with both professionalism and consumer protection in this industry.

Only when it became apparent that Washington state regulators had the authority to fine the company $25,000 for each compliance violation and put an unlicensed agent behind bars for 10 years did Zenefits snap to attention and demand its agents get licensed immediately. By then, it was too late. How could a startup investing millions into entering the insurance business fail to dot its I’s and cross its T’s?

At the outset, it seems Zenefits performed little to no background research about the industry it was entering. If a Silicon Valley company enters insurance and is not aware of the regulatory requirements, that points directly to failed due diligence. Agent licensing has been a primary aspect of insurance compliance for decades. Recently, the governing bodies of insurance regulation have begun instituting licensing requirements for claims adjusters as well.

Insurance has one of the most unique and complex regulatory frameworks of any industry. Any company that desires to solicit business must first understand the regulatory regimes for each state in which they do business. This model was put in place to protect consumers, who know less about the insurance they’re buying than the people selling it to them.

Against the backdrop of this consumer focus, the local nature of insurance lends itself to local regulation. Insurance is not a one-size-fits-all type of business—coverage for those living on a barrier island is very different from coverage for those living in Phoenix.

If Zenefits had gained an understanding of the insurance industry, it would have known insurance is a low-margin business. In fact, it’s another customer-protective regulation that keeps the margins low.

Consider this: In the ’80s and ’90s, life insurance carriers might have paid an agent a 110% commission. At that rate, the consumer wouldn't have cash value on that policy for 15 years because the agent took it all in commission up front. Regulators had to step in and level the playing field by capping agent commissions at 25%. Margins this low are a foreign concept to Silicon Valley fintechs and dot-coms like Zenefits.

At the risk of sounding like a new verse from the Music Man song “Iowa Stubborn,” a certain chip-on-the-shoulder attitude pervades the industry about regulating ourselves, too. While banks are virtually regulars at the bailout window at the Federal Reserve, there is no bailout window for insurance. When an insurance company goes bust, it is their competitors that step in and pay all of the losses. This a nearly foolproof incentive for competitors to watch each other’s business practices to ensure they stay solvent. Cheating on either the financial or market side is frowned upon, but the real teeth are on the market conduct side—those areas of business practice that directly affect the consumer.

I have to wonder: Will bringing in a federal prosecutor and instituting a corporate culture that includes no more drinking on the job be enough to save Zenefits?

John Sarich, vice president of strategy at VUE Software, is a senior solutions architect, strategic consultant, business adviser and analyst with more than 25 years of insurance industry experience.