Estimating the relation between digitalization and the market value of insurers

Abstract

We analyze the relation between digitalization and the market value of US insurance companies. To create a text‐based measure that captures the extent to which insurers digitalize, we apply an unsupervised machine learning algorithm—Latent Dirichlet Allocation—to their annual reports. We show that an increase in digitalization is associated with an increase in market valuations in the insurance sector. In detail, capital market participants seem to reward digitalization efforts of an insurer in the form of higher absolute market capitalizations and market‐to‐book ratios. Additionally, we provide evidence that the positive relation between digitalization and market valuations is robust to sentiment in the annual reports and the choice of the reference document on digitalization, both being issues of particular importance in text‐based analyses.

The Role of Digitalization and Environmental, Social, Governance in Enhancing Value Relevance of Accounting Information

“…202 On the other hand, Guo et al (2020) found that digitalization can increase firm performance while in crisis situation. Fritzsch et al (2021) found that digitalization can increase market valuation which result on higher market capitalization and market-to-book ratios. Wu et al (2022) has found that digital transformation can minimize the stock price crash risk.…”

Detecting insurance fraud using supervised and unsupervised machine learning

“…Although many studies have used traditional linear approaches, applying machine learning methods to detect insurance claim fraud has become increasingly popular. Current literature argues that this will play an important role in creating more efficient fraud detection mechanisms (Bauer et al, 2021), which could increase the market value of insurance companies (Fritzsch et al, 2021). Machine learning can be defined as a process in which “a computer observes some data, builds a model based on the data, and uses the model as both a hypothesis about the world and a piece of software that can solve problems” (Russell & Norvig, 2020).…”

How does medical insurance contribution affect corporate value? Evidence from China

“…Existing studies mainly focus on how firms handle operating risks (Gamba & Triantis, 2014), commodity price uncertainty (Haushalter et al, 2002;MacKay & Moeller, 2007), financial market risks, or a combination of all three (Smithson & Simkins, 2005). Moreover, recent studies such as Fritzsch et al (2021) find that introducing digitalization which potentially improves firm risk management practices, is also positively associated with corporate value.…”