Tag Archives: commission

Zenefits’ Troubles Don’t Let Brokers Off

Zenefits is in trouble. Serious, existential trouble. Some community-based benefit brokers are watching the calamity at Zenefits unfold with a mixture of schadenfreude and relief. Given the scorn and ridicule Zenefits heaped on these brokers, taking pleasure from its misfortune is hard to resist. Feeling relief, however, misreads the situation and is dangerous to one’s career.

Zenefits’ Troubles 

Zenefits could go out of business, and several of its employees could be jailed as a result of the business practices reported by William Alden of BuzzFeed News and other journalists. While unlikely, this is a possibility because:

  • Zenefits created software enabling some California employees to lie to regulators concerning the time they spent on pre-licensing training. California law requires those applying for an insurance license to devote 52 hours to this curriculum. Zenefits employees signed a form, under penalty of perjury, that they had done so. Some may not have. Perjury is a felony in California, and conviction can result in as much as four years’ imprisonment. If Zenefits cheated in qualifying agents to sell in California, other regulators are no doubt looking into whether the company did this in their states, too.
  • If found guilty of violating consumer protection laws, state regulators could revoke Zenefits’ insurance licenses. Without the license, Zenefits could no longer sell new policies, and insurance companies would likely terminate, for cause, their Zenefits contracts. The insurers would then stop paying commissions to Zenefits even on previously sold policies. License revocation in one state could result in losing their licenses elsewhere. A cascade across the country of revoked licenses and terminated contracts could cost Zenefits tens of millions of dollars.
  • If Zenefits loses its licenses, commissions on current policies and ability to sell new ones, then some of its more recent investors may demand their money back. (Let me be clear: I am not accusing anyone at Zenefits of committing fraud or any other crimes. What follows is totally and only hypothetical and speculative.) In May 2015, Zenefits raised $500 million in a capital round led by Fidelity Investments and private equity firm TPG. If Zenefits management knowingly hid legal problems from them (and I’m not accusing anyone of doing so), then Fidelity and TPG could claim inducement by fraud, seek to rescind their contract and demand Zenefits return their investment. I’m not saying this happened or that investors were misled in any way. Nonetheless, I’d be surprised if Fidelity and TPG lawyers are not also speculating about this.

Zenefits’ worst case scenario, then, is that the company pays millions of dollars in fines, loses many millions more in revenue, sees employees jailed, can no longer sell insurance, irreparably damages its brand and must repay some investors.

Maintain Perspective

That’s a pretty scary worst-case scenario. Based on we know today, it is also highly unlikely to happen. No regulator has found Zenefits in violation of anything. Regulators are unlikely to impose the most severe penalties available to them if their investigations do not reveal consumer harm. The steps David Sacks, Zenefits’ new CEO, is taking will likely mitigate any penalties imposed on the company. Several employees, including former CEO Parker Conrad and sales VP Sam Blond have already left the company, and more may follow. Zenefits now has its first compliance officer. Mr. Sacks also seeks to change Zenefits values.

I’m skeptical, however, that Zenefits can or will quickly change its culture and core values. I respect Mr. Sacks’ intentions, experience and abilities. He deserves a chance to make his turnaround work. Yet changing a company’s culture usually takes considerable time, and Zenefits’ culture is deeply infused with the Silicon Valley ethos of speed, innovation, disruption and risk taking. To transform Zenefits requires a different world view. Yet in announcing Mr. Parker’s resignation, the company added three board members—all current investors with no domain expertise.

In fact, no current Zenefits board members or executives listed on the site appear to have any experience in running a human resources firm, payroll company or insurance agency—the services Zenefits delivers. What they share is deep experience in well-known tech companies. Zenefits may be a technology company, but that tech is supposed to accomplish something. Only in places like Silicon Valley would lack at the top of the company of this domain expertise be celebrated. Zenefits seems to exist in a Valley-sized bubble, and it’s tough to change what’s in a bubble from the inside.

The Real Lesson of Zenefits

Yet Zenefits is likely to survive. It reportedly has enough cash on hand and no need to seek more. The most probable outcome from the various investigations is that, absent findings of intentional and substantial criminal malfeasance, Zenefits will keep its licenses, carriers will continue paying commissions and investors will keep their money in the company.

We don’t yet know how Zenefits’ saga plays out. What we do know are some lessons this scandal teaches, especially to brokers:

Lesson one: Consumer protection laws matter. Violate them, and there’s a huge price to pay; as there should be.

Lesson two: Arrogance is unbecoming and unhealthy. Zenefits is a company whose leaders proclaimed that community-based brokers were dead meat, promised to drink brokers’ milkshakes, claimed brokers barely knew how to use email, described their profession as a dead beast lying in the desert and, well, you get the idea. The danger is that arrogance of this magnitude easily morphs into hubris. Zenefits’ hubris was the apparent belief that it could ignore rules if they get in the way of achieving the growth promised investors.

Lesson three: Even broken companies get some things right. Zenefits identified a latent customer demand. Clients want more from brokers than help with benefit plans. They want to focus on their businesses and not be distracted by HR and benefit administration. Zenefits success makes clear there’s a disadvantage to only selling and servicing insurance plans. Clients want more from their brokers. Even in the unlikely event Zenefits goes away, this client need will not.

Lesson four: There’s more where they came from. Zenefits’ demise would not mean the end of well-funded tech companies challenging community-based benefit brokers. If Zenefits falls to the wayside, others are ready to take its place using the same tactic of giving away software to employers in exchange for being named the employers’ broker of record on benefit policies.

Seeing a bully humbled is always fun, and there’s no harm in brokers enjoying the sight of Zenefits in disarray. Those brokers who believe Zenefits predicament means they no longer need to step up the services and value they deliver their clients, however, are making a costly mistake.

zenefits

Zenefits Compliance Saga Takes a Turn

Things happen fast in the start-up world.

Early yesterday, I wrote a post on how Zenefits’ compliance challenges in Washington state could cost the company millions of dollars in lost commissions. While noting that it was only a matter of time before someone at Zenefits lost his job over the situation, I had no idea that Zenefits CEO Parker Conrad would resign later in the day, citing the compliance problems.

In a press release cited by VentureBeat.com announcing Conrad’s departure, Zenefits’ new CEO, David Sacks, who had been COO, declared, ”I believe that Zenefits has a great future ahead, but only if we do the right things. We sell insurance in a highly regulated industry. In order to do that, we must be properly licensed. For us, compliance is like oxygen. Without it, we die. The fact is that many of our internal processes, controls and actions around compliance have been inadequate, and some decisions have just been plain wrong. As a result, Parker has resigned.” (The entire press release is worth reading).

The loss of a founder and CEO is another cost Zenefits will pay for the alleged failure to comply with states’ insurance laws. I don’t believe they’re done paying for their mistake, however.

What follows is a slightly edited version of my earlier article:

Washington regulators are investigating Zenefits’ alleged use of unlicensed agents selling insurance policies in the state. This is not only embarrassing for a company as brash and boastful as Zenefits, but the company’s finances could be substantially affected, too. Not just because, if found guilty of this felony, Zenefits could face a multimillion-dollar fine. The far greater risk to Zenefits is the prospect of losing commission income — a lot of it.

William Alden at BuzzFeed News has done a great job pursuing the story of Zenefits’ unlicensed sales. Now Alden is reporting that, based on public records, it seems “83% of the insurance policies sold or serviced by the company through August 2015 were peddled by employees without necessary state licenses….”

The potential fallout is quite substantial even though only a small number of sales are involved — just 110 policies out of 132 sold or serviced by Zenefits in Washington between November 2013 and August 2015. “Soft dollar” costs include a damaged brand because of the bad press, distractions at all levels of the company and the need to address whether the company is ignoring other consumer protections.

Then there are the hard costs. 110 policies times the maximum $25,000 per violation that Washington can impose means fines of as much as $2.8 million. Financial penalties imposed by other states could add to this figure. While paying a $2.8 million fine is no laughing matter for a company losing money every month, this represents less than 0.5% of what Zenefits has raised from investors. However, the legal fines are, potentially, just the tip of the proverbial iceberg. As Alden points out, the fallout from this investigation could result in carriers dumping Zenefits, and that could cost the company far more than any criminal fines.

Carriers require agents to meet several requirements before contracting with them, and agents must continue to meet these requirements to keep the agreement in-force. Common provisions include being appropriately licensed, maintaining adequate errors and omissions coverage and not committing felonies or breaching fiduciary responsibilities. Fail to meet any of these requirements, and agents can find their contract terminated for cause.

Terminations for cause usually allow insurance companies to withhold future commissions from the agent and, depending on the specific terms of the contract, from the agent’s agency, as well. If an agency or agent knows or should have known he was in violation of contract terms when executing the agreement, carriers may be able to rescind the contract and demand repayment of commissions.

Being found guilty of a felony in Washington state could allow a carrier — any carrier, anywhere in the country — to terminate Zenefits’ agent contract for cause. Late last year, Zenefits CEO Conrad claimed the company was on track to earn $80 million in 2015. So, let’s see, millions times 50% … carry the one … yeah, this hurts. A lot.

A nuclear outcome is highly unlikely. The Washington state investigation into Zenefits is continuing, and Zenefits, to date, has been found guilty of nothing.

Even if Washington regulators find Zenefits committed a felony, for reasons described in a previous post, the outcome is highly unlikely to be a fatal blow to the company. Insurance regulators have considerable leeway in determining fines and penalties. Absent proof that Zenefits intentionally violated state law or that consumers experienced actual harm, the Washington State Department of Insurance is likely to conclude that this situation resulted from incompetence. The department might then impose a modest fine on Zenefits and subject the company to enhanced review of its licensing practices for a few years.

Let’s put this in perspective. Richard Nixon resigned the presidency as a result of what started off as a two-bit break-in. That kind of cascading escalation is extremely rare. What we’re seeing unfold in Washington state is probably not Zenefits’ Watergate moment.

Zenefits has already paid a small price for what it allegedly did. I’m guessing the whole mess has been a bit distracting to management. And the fact remains: Mishandling more than 80% of sales in a state is a sign of immense ineptitude, arrogance or both. Having this reality aired publicly is not good for Zenefits’ brand, and resources will need to be expended to make sure it doesn’t happen again. I’m not aware the company has fired anyone as a direct result of the lax licensing controls, but that could happen.

As a result of this fiasco, Zenefits has already taken down its controversial broker comparison pages in which the company used carefully selected criteria to compare itself to community-based agents. (I guess the company was reluctant to add “being investigated for multiple felonies” as one of the comparison points). This is a small sacrifice as the comparison page was likely an attempt to enhance search engine optimization rather than an effort to take business from the competition.

Zenefits has paid a small price. The open question is: How large a price will the company ultimately pay?

You Are No Longer an Insurance Agent

News flash! You are not an insurance agent.

Yes, you sell insurance products and services for commissions, but that’s not why your clients buy from you. Every successful insurance agent today understands that they do much more than transfer risk for their clients. Today’s successful insurance agents understand that they are first and foremost marketers, publishers, creators, innovators, speakers and value providers.

This may seem like a foreign concept, but it’s true.

No insurance producer can help clients financially if she can’t first paint an emotional picture through words and ideas. Marketing is not about manipulation, tricks or tactics. Today’s insurance buyers are too educated and untrusting to fall for inauthenticity. Today’s marketing is about great content.

Content is not limited to a website, emails or product and service descriptions. Everything a customer or prospective customer comes into contact with about you or your agency is content. Content is any medium through which you communicate with the people who may use your products or services. It could be the words on your webpage, the email sent to a client, a headline on your brochure or the words used during an appointment with a prospective client.

There is no hiding from content. It will make or break you.

However, most agents don’t seize this opportunity. In fact, most agents don’t even know the opportunity exists.

Ann Handley, author of “Everybody Writes,” says it best: “Ours is a world where technology and social idea have given us access and power: Every one one of us has the awesome opportunity to own our own online publishing platforms—websites, blogs, email newsletters, Facebook pages, Twitter streams and so on.

“I don’t use the phrase ‘awesome opportunity’ lightly. The opportunity to change how we communicate with people we are trying to reach—and what we communicate—is tremendous, yet we aren’t taking full advantage of it.”

With this great opportunity, why are the vast majority of insurance agents still standing on the sidelines, simply watching and waiting?

Some think they lack time, others say they lack of knowledge or skill, and others still believe that there is no need to change.

I contend you don’t really have a choice.

  • Your prospective clients have more options than ever before.
  • Your prospective clients have more resources than ever before.
  • Your prospective clients expect more from their agent than ever before.

Those agents who deliver on these expectations will stand out and earn business from their ideal clients. Those who don’t will continue to fight and scrape for what’s left.

So, I ask you a basic question: Are you a marketer or an insurance agent?

Trick question. You have to be both.

One is expected, the other will make you successful.

You are expected to understand policy terms, definitions, exclusions, coverage gaps, underwriting, endorsements and what all those strange acronyms mean.

You get paid for providing a positive experience through your content. Providing that is not easy, and that’s why most agents are struggling. It requires that you are much more than just smart, friendly and able to ask if you can provide a quote.

  • You have to help your customers achieve something that’s important to them.
  • You have to provide a unique viewpoint.
  • You have to put 100% focus on your customer and view the world through his eyes.

All three listed above take hard work, hustle, training, continual personal development and a passion that burns deep inside you.

This passion doesn’t come from outside sources. It starts and ends with you.

  • How badly do you want to make an impact?
  • How badly do you want to help others?
  • How badly do you want to become the industry leader?

To succeed, you must decide you will not settle for being just another insurance agent. You are a professional who earns trust through consistent and valuable content, offline and online, to your clients and prospective clients.

To be a successful insurance agent today, you must first be a marketer … and a good one.

The Shifting Sands of Group Benefits

If there is one thing that is consistent within the group and voluntary benefits market, it is that nothing is consistent. From year to year, market changes make it very difficult for insurers to get settled into a comfortable framework for moving forward.

Consider what insurers have to contend with:

  • Shifting mandates and regulations within the Affordable Care Act.
  • An increasing number of benefit administration firms and benefit enrollment partners.
  • Employer interest in increasing the number and type of voluntary benefits to produce well-rounded packages.
  • Employer requests to administer products and billing in ways that fit their systems and processes.
  • Increased need for accessible reporting so HR departments can track usage within their employee populations.
  • Market saturation from companies wanting to enter the voluntary and worksite space.

Though we can’t cover solutions to all of these in this blog entry, we can quickly look at strategies that make sense with the increasing number of players in the market.

In the past, carriers had a very close relationship with the employer market. Because of the complexity of employee benefit communication, especially in the large employer market, employers are engaging benefit administration firms and benefit enrollment partners. These partners will often offer a free or subsidized service; they bring relationships to the carrier and earn commissions that offset enrollment cost for the benefit partner.

The key benefit partners in the industry have begun to integrate with carriers before the sale. This allows a benefit partner to offer multiple carrier products for a single employer. Further, this will help ensure that the communication between the benefit partner and the carrier is predictable. Because brokers and benefit partners are, more than ever, responsible for bringing the benefit relationship to the carrier, integrating with them is as much a strategic need as it is an efficient way of transferring data.

Insurers are attracted to the group market because one sale means hundreds or thousands of premiums. Catering to and selling through brokers and benefit partners takes that multiplication to exponential proportions AND supplements an insurer’s own sales efforts. But many brokers will only carry lines of business that are simple to administer and prepared for the higher volume from a wider array of companies. Both of those questions are answered with technology solutions.

Most insurers are by now familiar with shifting sales channels. The difference in this case is that group benefits providers need to prove their abilities to meet employer needs and remain flexible to broker requests. In this and other areas, insurers need to prepare their systems for the future by building a foundation that is solid and proven, yet agile enough to handle the market’s unpredictability.

A Bizarre but Common Strategy: Hiring Incompetent Producers

Hiring incompetent producers is apparently the strategy of a group of agency owners who told me that my advice that no producer is better than a bad producer was:

  1. Just wrong
  2. Too harsh
  3. Short-sighted

I have seen some consultants make the same case, so I thought I should have an open mind and reconsider my position.

The consultants’ point was that every commission dollar sold is worth (pick a multiple) 1.3 or 1.5 or 2.0 times. That makes every commission dollar a commodity. From the agency owners’ perspective, one way to build value is to put as many commission dollars on the books as possible because the value is same regardless of whether the sales are profitable or unprofitable. The value is not affected by whether the sales are personal lines or commercial, whether the accounts carry more or less E&O risk. All sales carry the same value, in this perspective.

Some people will argue I have taken the consultants’ and agency owners’ point too far, but that is impossible. Remember, their point was that poor producers, meaning unprofitable producers, still have enough value to justify keeping them. This means that even if the producers’ sales have a negative 20% profit margin, which is common, the consultants and agency owners believe these sales have the same effective value as books of business with a 20% profit margin.

The strategy of adding sales without regard to profitability is quite relevant if the agency can grow fast enough and sell itself quickly enough. More than one such flip has made an agency owner wealthy. The key is how long the producer is with the agency before the sale. Let’s say that at the end of five years a producer has generated $150,000 of commissions. The profit on this book is (using industry standards for agencies with $1 million to $2 million in revenue):

incompetent

 

This excludes all administrative wages such as the bookkeeper, receptionist, claims and so forth. It excludes ANY owner compensation. It understates the CSR compensation, too, because the average commercial CSR makes much more than $35,000. If we include these real additional expenses proportionately, this book likely is still losing money in the fifth year, anywhere from $10,000 to $30,000. Losses in the prior years were even greater as the book was built.

Over five years, then, the agency has likely lost between $75,000 and $150,000 net. Using $75,000 and a one-times multiple and an agency sale in year five, the agency still nets $75,000 (($150,000 times 1.0) – $75,000) = $75,000.

But if the agency hangs on too long or the five-year loss is too great, this strategy fizzles. So to make this work financially, the agency owner has to have a firm and fast exit plan.

Why not hire quality producers initially? Then the agency gets profit and value simultaneously. Besides, who in their right mind would pay the same multiple for an unprofitable book as for a profitable book? Let’s use an EBITDA example. If the profit is $25,000 and the EBITDA multiple is six, then the value is $150,000. What is the value of a book with a loss of $25,000 and a multiple of six times?

Why would someone pay the same multiple for a low-profit book as for a high-profit book? Maybe the thought is that books all average out. But why do they have to average out?

A poor producer cannot take an entire book, even most of a book, with him if fired. If the producers were so good, they would not have been fired. So agency owners can eliminate unprofitable producers and reassign their books to staff or other producers at lower commission rates, which is common when books are transferred between producers. This is a key secret to the success some serial acquirers have achieved. They completely understand that poor producers are unnecessary so when they buy, they fire and they keep the business but make it profitable. Even if 20% is lost, that is 20% losing money vs. 80% making money.

I truly feel for agency owners struggling to find quality producers. If it was easy, everyone would do it. Is hiring poor producers really the solution, though?

My experience, and I’ve seen the hard data, is that when agency owners properly prepare their agencies for finding quality producers, use the right interviewing tools and tests and create a quality development/management plan, successful hire percentages quadruple. All the work — and it is a lot of work —  is before the hire, and, given all that agency owners already have to do, finding the time and energy for this key element is not so easy, but it is essential if the goal is to truly build profit and value.