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In what other insurtechs should take as a warning to ensure their compliance procedures are in order, US-based human resources and health benefits startup Zenefits has just settled with a seventh state regarding licensing violations.
Zenefits has faced legal challenges from six US states since February of this year related to its insurance sales procedures, resulting in fines of $300,000. It added to that tally on Monday with a $7 million fine from the California Department of Insurance, according to the Wall Street Journal. The fine is the biggest for Zenefits so far and was largely the result of its allowing unlicensed staff to sell insurance, while using software to get around certain licensing requirements.
The firm’s business and licensing model is one commonly used by US insurtechs. Zenefits doesn’t underwrite its own policies. Instead, it acts as a broker that sells third-party insurers’ policies to its clients for commission. This model is used by many insurtechs because it doesn’t require them to get fully licensed as an insurer, a process that can be complex and expensive thanks to capital requirements. In most states, these firms only need to get brokerage licenses, which typically have less onerous requirements. But Zenefits’ woes indicate the penalties that firms can expect if they fail to obtain and maintain those licenses correctly.
The number of fines Zenefits has received highlights the complexities of the US regulatory environment. Getting state brokerage licenses may be less onerous than getting a full insurance license, but it forms a much higher regulatory burden for US insurtechs than their counterparts face in other jurisdictions, like in the UK or Australia where only one license is required.
Not only do US firms have to obtain multiple licenses, they also have to adhere to multiple sets of requirements — and face multiple penalties if they are found to have broken the rules. It’s for this reason that we have seen some US insurtechs, such as Trov, launch in non-domestic markets first. We think more new entrants will take this approach as the insurtech market continues to grow.
The global insurance industry is worth nearly $5 trillion, and insurance companies are at risk of losing a share of this valuable market to new entrants. That’s because these legacy players have been even slower to modernize than their counterparts in other financial services industries.
This has created an opportunity for a group of firms known as insurtechs. These startups are leveraging new technology and a better understanding of consumer expectations to increase efficiencies in the insurance industry. Some are helping incumbents deliver better end products, while others are directly competing with legacy players.
Sarah Kocianski, senior research analyst for BI Intelligence, Business Insider’s premium research service, has compiled a detailed report on insurtechs that looks at the drivers behind the increasing number of insurtech companies, how they are helping or disrupting legacy players in the insurance industry, and where legacy players are innovating off their own backs.
Here are some of the key takeaways from the report:
The opportunity is currently biggest in the US and Europe. That’s because these regions have large, very mature insurance industries.
Insurtechs’ products and services mostly target retail customers. This includes small businesses and consumers.
Most insurtechs are acting as enablers. This means that they offer products and services that help insurers and reinsurers improve their processes and better serve customers.
Of the main players in the insurance industry, brokers are most at risk of disruption. This is because insurtechs can easily replicate their services and are solving historical industry problems faster than legacy players.
Legacy players are also innovating. In particular, insurers and reinsurers are investing in insurtechs and fintechs working with relevant technologies. At the same time, they are improving their own direct-to-consumer digital interfaces, increasing their disruptive threat to brokers.
In full, the report:
Explains the structure and current state of the insurance market.
Highlights areas where insurtechs can help legacy players modernize.
Describes where insurtechs are competing with incumbents and how their models compare.
Provides case studies of insurtechs.
Outlines the legacy response.
And much more.
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