Estimating the Relation between Digitalization and the Market Value of Insurers

Journal of Risk and Insurance, Forthcoming

47 Pages Posted: 26 Apr 2021 Last revised: 11 May 2021

See all articles by Simon Fritzsch

Simon Fritzsch

University of Leipzig - Faculty of Economics and Management Science

Philipp Scharner

University of Leipzig - Faculty of Economics and Management Science

Gregor N. F. Weiss

University of Leipzig - Faculty of Economics and Management Science

Date Written: April 25, 2021

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.

Keywords: Digitalization, Latent Dirichlet Allocation, Machine Learning, Market Valuation

JEL Classification: C33, C61, G22

Suggested Citation

Fritzsch, Simon and Scharner, Philipp and Weiss, Gregor N. F., Estimating the Relation between Digitalization and the Market Value of Insurers (April 25, 2021). Journal of Risk and Insurance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3833725

Simon Fritzsch

University of Leipzig - Faculty of Economics and Management Science ( email )

Leipzig, 04109
Germany

Philipp Scharner

University of Leipzig - Faculty of Economics and Management Science ( email )

Leipzig, 04109
Germany

Gregor N. F. Weiss (Contact Author)

University of Leipzig - Faculty of Economics and Management Science ( email )

Grimmaische Str. 12
Leipzig, 04109
Germany
+49 341 97 33821 (Phone)
+49 341 97 33829 (Fax)

HOME PAGE: http://www.wifa.uni-leipzig.de/nfdl

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