Zenefits Fights Legal Obstacles in Business Model that Provides Free Software

By Christopher Mohr
TMCnet Contributing Writer

Zenefits has found itself recently involved in several court battles with state insurance regulators over whether or not their business model constitutes an illegal rebate. It is the latest example of technology taking market share from an industry whose services are traditionally provided through brokers.

For those not familiar, here’s Zenefits’ business model in a nutshell: An HR department of a business registers to use Zenefits online application to manage employees, contractors, and benefits. There is no charge for using the service in and of itself; however, if the HR department wants to purchase insurance through Zenefits, then Zenefits collects a fee from the insurance provider.

Insurance brokers are upset at the new competition and argue that Zenefits is functioning like a broker and providing an illegal rebate to customers. Zenefits argues that since no one is required to purchase insurance and benefits to use its software, there are no rebates, illegal or otherwise. This is simply competition in a capitalist marketplace.

It is pure speculation to say what will ultimately happen with Zenefits’ future as a company, but if past results are any indication, the future appears very bright for the San Francisco-based company. According to Wired, it has prevailed in battles with regulators in four states, but the fight is far from over.

Nonetheless, Zenefits has the money to stay in the fight long term, so it’s unlikely to disappear. One question that Zenefits’ likely success would raise is what effect it will have on the demand for insurance brokers.

Some industries have all but ceased to exist because of the Internet and technology. Investors use sites like E-Trade instead of stockbrokers, and travelers use sites like Priceline instead of a travel agent, for example.

Whether or not insurance brokers eventually go the way of eight-track tapes or the passenger pigeon is again more speculation. Zenefits’ CEO Conrad Parker told Wired that half of Zenefits’ users do not purchase insurance and benefits through the software. If Zenefits gets the widespread blessing of state regulators throughout the U.S., there is nothing stopping the brokers from acting on their own or forming a consortium and creating their own free insurance application to compete against Zenefits.

Ultimately, the fight will be won by avoiding commoditization. If the perception is that traditional insurance brokers do not provide any real value that could not also be provided by an automated system, then the brokers’ days are numbered. If the brokers can win over their share of customers by offering them a stellar experience, then Zenefits is simply another competitor in a crowded field. All insurance industry observers can do at this point is stay tuned to see what happens.