Two models were used to study the relationships between profitability and the level of information technology (IT) sophistication among long-term life insurance companies in South Africa. The first model was submitted by Kwong et al. in a study of six petroleum producing companies in Malaysia. They proposed a computerization index (CI) which incorporated factors that affect the level of computerization in a company and compared the CI with profitability ratios such as profit/total assets, profit/turnover, turnover/total assets, gross margin/turnover, profit growth rate and sales growth rate. The second model was proposed by Harris et al. in a study among forty long-term life insurance companies in America. They used the ratio of non-interest operating expense to premium income (operating expense ratio) to measure profitability, and the ratio of IT expense to non-interest operating expense (IT expense ratio) to measure the level of IT capital intensity. The results of the study showed a positive correlation between the Cl and the financial ratios, indicating that as the level of computerization increases, profitability also increases. The results also showed that the most profitable firms are more likely to spend a significantly higher proportion of their non-interest operating expenses on IT, and that the least profitable firms are likely to spend a significantly lower proportion of their non-interest operating expenses on IT. The study concludes by accepting the two studies as valid among the long-term life insurance industry in South Africa.
The profit impact of IT investment
