As the pool of qualified health insurance companies has dwindled, insurance agents are looking for ways to set themselves apart from their competitors. Technology can be a great differentiator, and payroll service companies are eager to help supply the technology.

Payroll service providers already maintain the data that insurance brokers need to do their jobs. Some payroll service companies now are offering Web-based employee self-service for payroll and human resources information, which dovetails perfectly with online benefit enrollment.

In addition, payroll services, because of the accuracy of the data they maintain for payroll, can be key links in the process of transmitting data directly to insurance carriers on an ongoing basis.

Lastly, regional, independently-owned payroll services providers often share common competitors with insurance brokers–namely, large, national payroll service bureaus and professional employment organizations, or PEOs.

PEOs have been competing with both insurance brokers and payroll service companies for many years. In 2005, the PEO industry generated more than $60 billion in gross revenues and paid nearly 3 million employees. The industry leaders in employee leasing–which happen to be the nation’s 2 largest payroll service bureaus–generated nearly $2 billion dollars in PEO-related revenue last year.

However, there are several downsides to PEOs. Some have gone out of business because of the natural insurance selection process, which tends to attract unhealthy, unsafe groups to insurance pools. The PEO industry also experienced a record year for fraud in 2005, as several PEO owners absconded with their clients’ insurance funds and tax money. In addition, some PEOs charge high fees that more than offset any savings that they may have offered clients who join their insurance pool. And some PEOs fail to perform the breadth of HR and payroll functions as competently as companies that specialize in a particular arena.

Some PEOs have also entered the insurance market directly through other avenues. For example, 2 of the largest national payroll services companies prominently advertise insurance products on their websites, including health insurance and pay-as-you-go workers’ compensation.

Although some smaller payroll providers have also entered the pay-as-you-go workers’ compensation business, the great majority of smaller, privately held payroll services refrain from selling other types of insurance. Many of these payroll services already offer ancillary HR products, including time and attendance systems, HR software, and retirement plans. They, too, are looking for additional revenue sources from their current clients, as they strive to compete with none other than large national payroll service bureaus and PEOs.

Some insurance brokers and payroll service providers have begun teaming up, going head to head with PEOs by offering an administrative services organization. The ASO gives companies the ability to outsource their payroll and HR functions on an ? la carte basis. This arrangement allows both parties to handle the functions that they specialize in, providing a better overall value for the end client.

Because PEOs tend to charge high per-employee fees, an ASO often can save a client thousands of dollars. And an ASO also offers clients the flexibility to change individual services without having to change their entire payroll and HR setup–a necessity when leaving a PEO.

Kicker: Warning Signs

WHAT TO WATCH OUT FOR

- PEOs that attract high numbers of unhealthy groups

- Fraud

- High fees

- Lack of expertise