By Rick Huckstep

About a week ago, as I was going through my daily routine of catching up on news stories and shifting through numerous blog posts, I was drawn to the article by Jim Bruene on Finovate entitled FinTech Unicorn List: 36 companies + 34 closing in.

In the article, Bruene lists the 36 companies founded since year 2000 that break through the $1bn valuation mark that elevates them to A-list celebrity status (the list actually sets the valuation at $900m to qualify as a Unicorn, but lets not split hairs!). The article also lists the next wave of challengers coming through to join this illustrious club. Bruene names this group of 34 contenders as the “semi-unicorns” based on having a valuation of $500m and above.

As I went through the well-compiled list of the galacticos of the Fintech world, I was searching for the most illusive breed of them all…the InsureTech Unicorn!

Of this list of 70 Fintechs, the vast majority (39) of them were either in the Payments or Lending space, with (only) four of them in the world of Insurance. Three of them are essentially all about insurance distribution, or the sales side of the insurance market. The fourth is ClimateCorp, who, like Meteo Protect featured in the Daily Fintech last month, are in the weather risk management space.

Top of the InsureTech pile is Zenefits, valued at a hefty $4.5bn and at number 5 in the Fintech hit parade.

Zenefits provide a free-to-use, SaaS platform to deliver Human Resources software for smaller companies in the United States (leaving the larger firms to the likes of Peoplesoft or Workday). The platform provides an automated approach to the primary function of the HR department in a small business. It can be used to run the payroll, manage employee benefits, handle new starters and leavers, and track for vacation and employee absence.

But what has this got to do with insurance?

This Californian based start-up, led by Parker Conrad is disrupting the group health insurance market by cutting out the broker from the supply chain.

They make money by charging the insurance (and any other external service provider) a fee or commission. The reason they are categorized in Insurance is that their primary source of income is through these commissions from group health insurance, which they get by replacing the role of the traditional broker.

The opportunity in the market came from the affordability, or lack of, within small businesses for an IT system to manage their HR function. Zenefits addressed the problem in the market and built an HR platform that they provide free to use, and in so doing they established a client base.

Each of these new clients that signs up to the free HR software have the same needs; which are to provide their employees with services, such as payroll, employee benefits and insurance. Zenefits make it easy for their clients to buy these services through the platform as a one-stop shop, and in so doing; they take a margin from the external provider.

And the reason that they are attracting so much attention is that this is the classic disruptive start-up model.

They have spotted an area of the market that they can replace with technology automation, and thereby remove significant cost from the process.

The introduction of the Patient Protection and Affordable Care Act in 2010, aka Obamacare, was the most significant event in over 40 years to impact the provision of healthcare in the USA. It also created the environment for Zenefits to succeed!

But Zenefits started by addressing a different problem. With nothing to do with the reforms in healthcare, they set out to tackle the problem in the market with the cost for small businesses to manage their workforce. An IT system to automate human resources functions can be costly with manual spreadsheet-based operations the only alternative. With Obamacare, additional work was piled onto small business with the introduction of more paperwork (and cost) to enable the Government’s assessment of eligibility for the public health exchanges.

However, the introduction in 2014 of the changes to health insurance addressed one of the biggest issues for small employers. These changes removed the obligation on firms with fewer than 51 employees to provide medical underwriting and this meant that health insurance could be provided simply based on age and location.

With this information already in the platform, Zenefits was able to automate the provision of group health insurance quicker and cheaper than the traditional brokers were able to do. Now, employers must treat all employees on an equal footing when it comes to health insurance with no requirement to take into account any pre-existing medical conditions.

Zenefits has not come without some resistance through from the industry, and from the regulator, which is a sure fire sign that the disruptive threat from Zenefits is being felt and is being taken seriously. Whilst they are up and running in about 30 states in the US, this hasn’t all been plain sailing in all of them.

Last year, Zenefits stopped taking new clients in Utah having fallen foul of the state regulator. The issue put forward by Utah’s insurance department at the time was that the free to use software was effectively a rebate against the purchase of health insurance, which is outlawed in the state of Utah. They also argued that the fair market value for providing HR software is significantly greater than the value of the commissions that Zenefits receive from the insurance and other providers, which was a tenuous argument at the least!

This action in Utah was publicly derided by Conrad, and his supporters, who were able to list other states, such as Texas and Washington, that had declared this business model to be legit. The insurance broker community has a powerful lobby but eventually Zenefits won the argument. Faced with looking like a Luddite state and being seen as anti-innovation, in April this year, Utah quickly introduced a bill that stated that free to use software that led to insurance provided by Zenefits and their like, would not be considered an inducement or rebate.

In common with all the businesses on the Unicorn list, the business model behind Zenefits is remarkably simple. Which is what enabled them to get started on their own means without a massive early distraction trying to raise seed funding.

As all entrepreneurs know only too well, raising serious levels of funding is always much easier (relatively speaking) when the start-up has already established a business, albeit small scale. As they build traction, they get to prove that the business has legs and is more than a pipe dream. Most importantly they do two things;

• they show a market exists
• they get invaluable feedback from early adopter customers

Earlier this month, a further $500m was raised in a series C round of funding which triggered the $4.5bn valuation. For Zenefits, they are now in scale-up and the days of persuading investors of their business idea are history, which in their case isn’t very long as they’ve only been going for a couple of years!