on May 11 2013
I really like the Patient Protection and Affordable Care Act ("PPACA" aka "Obamacare") and want it to work. My idea serves a niche market that will likely grow as the insurance industry adapts to PPACA: many industry experts project that the legislation will (indirectly) drive health insurance brokers to either abandon the small-group market, or begin charging small customers for administrative services. Today, small employers rely on brokers to shoulder much of the administrative hassle of offering basic employee benefits like health insurance.
I also remember the annoyances of setting up employee insurance and benefits for my last company (Wikinvest/SigFig). I've spoken with a lot of insurance brokers and small-company founders. Most say they would use the service.
My last role at Amgen (6 years ago) was focused on payor strategy so I'm familiar with health insurance. I also have California Life, Health, Property & Casualty insurance licenses – necessary to start this company. At SigFig, I led the team that built our sync integrations with around 100 different brokerage firms (we didn't use Yodlee) so I have expertise in building sync technology.
What's new is my integration with payroll systems and the fact that my platform will bring together several distinct tools into one coherent product. Some companies are building good insurance quoting engines. Others are building online enrollment tools. Still others are building marketplaces where you can compare prices across insurance carriers. I'm the only one I know of that aims to knit all three together and connect them to companies' payroll systems to create a coherent benefits service.
Today, small companies buy health insurance from brokers. Brokers are salespeople, and pursue the administrative, after-market service aspect of their jobs with varying levels of enthusiasm. Even the most diligent brokers can't set up payroll deduction changes and so that task is always left to the employer. For non-health benefits, WageWorks (NYSE:WAGE) is an employer service that sets up tax-advantaged accounts employees can use for things like transportation and child-care costs. Employers pay $5 / employee / month for this service (I plan to be free). And because WageWorks doesn't integrate with payroll systems, employers still have to handle changes manually when an employee says he doesn't want to put money towards a MUNI pass this month because he's on vacation.
Brokers own most of the client relationships today. There are thousands of them, ranging from sole-proprietorships to behemoths like Marsh & Mclennon (NYSE:MMC).
HR firms like TriNet take this entire headache off your hands, but they cost about $200 per employee per month, while I am free.
There are some companies like Bloom Health (acquired by WellPoint) with slick UIs that help small businesses put employees on individual insurance plans rather than group insurance. While this offers employees more choices, it unfortunately doesn't have the tax advantages of group plans. This is trendy right now because many people believe small businesses will stop offering group health insurance in 2014 once they can foist employees into the state exchanges. I'm more skeptical of whether this will happen but my platform can be agnostic and offer whatever coverage employers want to offer.
Health insurance companies themselves are going after this space -- creating online tools for small-business enrollment, acquiring companies that do the same, and hiring companies like Empyrean Health to build them their own small-business health benefits exchange. Most of the big insurers think the business model for small-group brokers is going to break in 2014 when they cut commissions, and want to have a system in place to fill the void. These guys scare me the least, because they don't have good technology people and tend to make bad choices on product.
The PPACA-mandated state exchanges will also sell small-group health plans to businesses under 25 employees. But these exchanges will be a marketplace only (no servicing or administrative help), won't sell dental or vision plans, and anyway I don't think the health care equivalent of the DMV has a chance to win in this space.
Good product is hard. Most large, non-tech companies are constitutionally incapable of building great technology, and they tend to make short-sighted choices when it comes to product. This is particularly true in the insurance industry.
Not if you're doing it with technology. Brokers are just as much victims of the poor state of technology in this industry as their clients. Their profitability is challenged only because they do so much work manually & on paper.
That the right product needs to make life easier for a company's CEO or HR person.
Astoundingly, most tools the insurance industry is developing today are designed to make brokers' lives easier, but don't do anything for the employers themselves. Several companies are building software that connects brokers' off-the-shelf agency management systems to carriers so that brokers can enter clients' information just once but get quotes from multiple carriers (today brokers have to do this separately for each carrier they want to quote). These tools don't serve employers.
Other insurance sites are too focused on price-comparison. Cost savings is a powerful message if it's true, but these sites aren't able to deliver on it. And because they don't offer tools to service and administer policies going forward, they make life harder for their client in comparison to working with a broker.
Initially, commissions on health insurance sales. But other products I plan to offer on my platform (dental and vision insurance, 401Ks, pre-tax transportation accounts for employees, pre-tax cafeteria plans for childcare expenses) also generate revenue without requiring me to charge the company or its employees.
In California today, health insurance commissions are 7% of policy premiums, paid in perpetuity. Because they are paid by insurers, not my clients, I can offer my users a free service while making significant revenue per user from day one.
As an aside, the insurance companies are threatening to cut these commissions by 30%-50% in 2014 as a result of the Medical Loss Ratio Minimums stipulated by PPACA. I am hoping they do so, because I think this will squeeze out a lot of traditional brokers that would otherwise compete with me.
As an example of one of the other, future revenue streams: if I offer free 401K plans on my platform under my own brand (most likely outsourcing the back end / execution to State Street bank) asset managers that run mutual funds will pay me ~ 50 bps on any employee assets invested through my platform (Vanguard is the one notable exception). Even if I outsource the 401K portion of my platform to another company like Fidelity, I'm pretty sure I can get them to pay me $300 - $500 per funded 401K account because 401K accounts are a big profit center for most big asset managers.
I have a couple strategies to get clients:
1) Initially, I want to sell to tech companies in the bay area. I have a strong personal network of potential clients here and insurance companies' weak technology is most painful for companies enrolling for the first time (and particularly infuriating to tech companies, which expect better). So, my easiest sell will be to new companies that don't already work with an insurance broker. I'd like to get investment from several of the most active angel investors, and request introductions to their portfolio companies as potential clients as part of the deal. Because commissions are high, I can probably fund a lot of my own growth with revenue from these early clients if necessary.
2) My projected revenues per client company are high enough to support a direct sales force (My client-service costs are much lower because I'm doing it with technology instead of by hand the way traditional brokers do).
I don't really know, and it doesn't matter a great deal for my business. We'll integrate with the exchanges when they come out, and they'll be just another source of plans on my site -- just like United, Blue Cross, Kaiser. We earn commissions for selling plans on the exchange, just like for regular plans.
Companies with less than 100 employees. There are around 2.2 Million businesses in the US with between 5 and 99 employees.
Not being able to reach customers fast enough to be able to grow quickly.
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