Article Preview
Top1. Introduction
Firms invest in technology to improve efficiency, provide better customer service, increase profitability, or for various other strategic or mission-driven reasons. In a perfect world, the decision to invest in technology would be a simple capital budgeting project evaluation where the firm forecasts future cash flows generated by the investment and discounts those cash flows back to the present using a discount rate that represents the project’s risk. However, technology investments often do not have clear expected cash flows which makes the investment evaluation and adoption decision more difficult.
Information technology (IT) spending is assumed to create business value yet there is little consensus on how to measure that value creation. Much of this problem is related to the limited availability of data, but research issues also emerge with regard to how we measure the positive effect on the firm. The benefits may be less tangible and harder to measure than a simple positive net present value. For example, Karanja and Bhatt (2014) studied IT investments and innovation. They conclude that IT investments indirectly create value since they are linked to innovation via a factor score representing the firm’s number of applied patents and granted patents. Therefore, firms devoting more resources to IT investments are more innovative and reap the positive benefits of that innovation.
Other studies provide conflicting evidence of the positive impact of IT spending on the firm. Shin (2006) looks at the impact of IT intensity on the firm. He measures IT intensity by scaling IT or IS budgets by selling and general administrative expenses. Shin finds that IT investments and firm performance have an inverse relationship. Given this conflicting evidence, how do financial managers and chief information officers decide on technology adoptions? Shin’s sample included 317 total firms split into two broad industry categories of manufacturing (252 firms) and service (65 firms). This method is consistent with most IT studies that collapse firms into broad non-industry specific samples. Shin (2006) finds results differ depending on industry category. More recently, a paper by Ren and Dewan (2015) finds that the impact of IT investing differs by industry. Even more specific to this research is a study by Copeland and Cabanda (2018) that evaluated the link between efficiency and technology in the publicly-held insurance industry. Their research shows a positive significant relationship between technical efficiency and the insurers’ financial performance.
Research shows that increasing market share is one indirect way that firms may benefit from investing in IT. For example, Rai et al. (1996), Baldwin and Sabourin (2002) and Kim and Davidson (2004) all find that higher IT spending increases market share. In the insurance industry market share is important since it can lead to economies of scale in underwriting that lower costs. A recent KPMG market study of auto insurance highlights the importance of increasing market share to reduce costs.1 Industry changes, such as anticipated reductions in claims due to better safety of autonomous vehicles, will make it necessary for property and casualty insurers to become more efficient in order to survive. The study estimates that the auto insurance market will shrink by 70% by 2050.
The insurance industry is a highly regulated financial service industry that differs from other industries. Given the conflicting evidence surrounding the benefits of IT investments and significant differences across industries, in this paper we investigate factors that drive IT spending in the property and casualty (P&C) insurance industry. In addition, given the importance of market share we investigate the impact of technology spending on the market share of P&C insurance firms. No study to date conducts a similar analysis in this industry.
The remainder of this paper is organized in the following manner. Section 2 contains a review of the relevant literature. Section 3 presents the data source and methodology used to evaluate technology spending in the P&C insurance industry. Section 4 contains the results and Section 5 presents our conclusions and suggestions for future research.