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Insurance unicorn cut in half

healthcareMAUnicorns, private, VC-backed firms with valuations over $1 billion had been growing by leaps and bounds this year.  But, now those valuations are under pressure.  The most dramatic of these in insurance is Zenefits, an online health insurance broker.  Press reports today say that Fidelity cut its valuation for Zenefits by 48% from its May round, still a unicorn but a much smaller one at a reported $2.34 billion.  That cannot be making shareholders happy.

The report also says that turnover is high and telephone sales representatives in Arizona are being paid $30,000 per year. No surprise at those low wage levels.

That seems to jive with anecdotal reports that there is high client leakage at first renewal when the need for consultative brokerage work becomes more apparent than when Zenefits initially takes over the work of traditional insurance brokers by “Broker of Record” letter.  Poorly paid 800-number representatives have proved a problem in many complex insurance markets.

The latest reports suggest that revenue per employee at Zenefits is now about $28,000 per person, a long way from insurance brokerage industry standards of $200,000 per person.  Of course, Zenefits is in growth mode and they would argue that they can make a profit at a lower per employee expense.  If it can keep costs to $100,000 per person, well below industry standards, then its burn rate is $115 million per year.  Zenefits is not announcing its burn rate but the valuation cut by Fidelity means that they will not want to raise new capital anytime soon at a lower valuation.

The company calls itself a software company but is it really an insurance broker?  Therein lies the rub.  Can Zenefits learn how to be a good insurance broker before insurance brokers develop or buy systems that provide the same services to their customer bases?  There is little that can be protected by intellectual property in the software of Zenefits so it is little surprise that competitive responses are happening in real time including here at Gallagher WGA.  But, then again, there is little keeping Zenefits from learning the consultative skills required in order to keep the business that they are attracting, perhaps a few broker acquisitions might help them get there.  But, tech arrogance might get in the way of “buying” expertise.  The race is on, but new reports suggest that it will not be quite as easy a romp for Zenefits as previously thought by its investors.

About the Author

Phil Edmundson is the Area Chairman of Gallagher WGA with over 30 years in the insurance industry. He manages innovation, strategy, talent acquisition and development for this leading insurance brokerage.

617.646.0229 | Phil_Edmundson@ajg.comConnect with Phil on LinkedIn |
Follow Phil @PhilEdmundson

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