BenefitVault shows how Fintech & innovation does not have to be disruptive
Prior to World War 2, few Americans had health insurance. For those that did, the majority of policies only offered limited cover for hospital rooms, board and ancillary services. When the National War Labor Board froze wages and post-war shortages in the workforce were prevalent, employers needed to find new ways to attract scarce resources.
Offering health insurance was one of them. And this was an attractive way to tempt employees because they had the support of unions and they were tax-free. And this set the trend for Americans to take their life and health insurances through services offered by employers, who in turn were the customers of brokers representing the insurance carriers.
Over time, this became the norm for life and health insurances to be bought through employers. However, as this trend grew then so did the overhead on employers to administer the process of providing and paying for insurance services for its workforce.
Then came the introduction of the Patient Protection and Affordable Care Act in 2010, aka Obamacare. And the market started to shift significantly!
To encourage greater participation in basic insurance cover, especially amongst those on low incomes, Obamacare made it advantageous for employees to buy insurance direct and no longer through their employer. However, for the majority of workers, they had never bought or directly paid for their life and health insurances because they’d relied on their employers to do it!
In previous blogs, I have covered two of the Fintech Unicorns who have found their niche in this new Obamacare world, namely Oscar and Zenefits. And this week, I feature an Insurance Tech startup that has already raised $3.8m in venture capital and is backed by a family with an awesome pedigree in the insurance marketplace.
The firm is BenefitVault, and this week I Skyped with their President, Ryan Toner.
Ryan explained to me how BenefitVault works as a payment service for the insurance industry. “BenefitVault takes away the hassle and burden of making the monthly premium payments on behalf of workers and employers alike.”
The current way of working is that employers deduct an amount from each employee through their payroll, which is commonly paid every two weeks in the US rather than monthly. The employer reconciles all premium deductions across the workforce and then settles with all the carriers that offer the different insurance services to the workforce.
But, here’s the problem.
The workforce is constantly changing and the employer must make adjustments on an ongoing basis for leavers, new hires and absenteeism. As a result, premiums collected and paid may not match the carrier’s expectations, which triggers a process known as “benefits administration and bill reconciliation”.
This is quite an overhead for the employers.
Which is fine for the employee when the employer does all the work! However, post Obamacare, as employees have taken direct control of their insurance cover, this burden of making insurance cover choices and making sure premiums are paid on time has now shifted to the employee. Now, they have the problem too!
This is where BenefitVault comes into play. Employees create an Individual Payment Account or IPA on the BenefitVault platform and from here they manage all premium payments to the various carriers that provide insurance cover. Payroll deductions and any associated tax treatment are still handled by the employer through the payroll and are paid into the IPA run by BenefitVault.
BenefitVault will then manage the premium settlements across the carriers that provide insurance services to the employee. They provide a consolidated view back to the employee so that it looks like they have “one” premium payment going out each month. And if they are short on funds in the IPA because, say, the payroll hasn’t come through on time, then BenefitVault provides the option for a secondary source of funding into the IPA rather than default on a premium payment.
This way, the employee has piece of mind that the benefits administration and bill reconciliation process is being taken care off, just as it was by their employer.
And because these IPA’s are tied to an individual, they can take them with them should they chose to change jobs, which, depending on the insurance product, wasn’t always so easy to do in the traditional way of working.
In the BenefitVault model, the broker continues to service the employer, as they did in the past, and advise on all things insurance. For an employer to be competitive, they need to offer a robust portfolio of benefits to staff. And the broker’s job is to evaluate the plans an employer is going to offer and negotiate terms and rates with the insurance carriers in order to meet the employer’s budget.
For example, a growing trend in healthcare has been the high-deductible health plan. These plans keep premiums down and pass risk on to the employee. Often times, the broker will recommend a high deductible plan in conjunction with other voluntary products, like Critical Illness or Accident insurance. The two plans together reduce risk to the employee but save the employer in total premium expense.
In this example, the broker just made a recommendation that will save the employer money, but means that they will have more administration work to do, (because more products means more reconciliation, etc.).
So, while the high-deductible plan paired with an Accident or Critical Illness plan may be the best option financially for both the employer and employee, it does result in more work for the employer and often times they will push back on this and opt for a single plan for the employee.
BenefitVault solves this problem of the conflict of interest between the cost to the employer and benefit to the employee!
They become the vehicle that allows the broker to recommend additional benefits and packages, reducing or containing employer cost, without adding work to the employer. Often times BenefitVault actually reduces the administration overhead for the employer.
BenefitVault charge around $5 a month for each account and in many cases the cost is shared between the employee, employer, carrier and broker.
It is a win-win for all parties. Employers gets to offer a more robust benefit program, employees have access to benefits they did not have in the past, and carriers, brokers and agents are able to distribute products without adding additional cost on the employer.
BenefitVault have been quite deliberate in their efforts to make this as effortless and simple as using PayPal and to become a key enabling technology in the fabric of the US insurance market.
BenefitVault was formed in 2013 and is already on target to hit 30,000 customers by the end of the year. They are based in Philadelphia, the hometown of another Insurance Tech startup I covered a few months ago, Abaris, who introduced me to BenefitVault.
And Ryan comes from an “insurance family”. His father and CEO of BenefitVault, Cary Toner, founded insurance software firm iPipeline, which he sold in 2008. By coincidence, iPipeline was bought this week by Thoma Bravo for an undisclosed amount, although back in November a report in Bloomberg News gave a valuation of $500m.
Before that, Cary Toner ran a life insurance agency called The Toner Organization, which went on to merge with another organization and later sold to Citi for $1.47bn.
These are early days for BenefitVault, but they’ve identified the gap in the market where the opportunity exists. And it’s huge! BenefitVault have kept their model simple and highly scalable. Parallels can be drawn with PayPal in how BenefitVault have approached the market.
And interestingly, they don’t have any natural competition! This isn’t a disruptive play. They are not taking business away from anyone else. Instead, BenefitVault are adding something new to the market and already the signs for success are clear to see.
