Academic journal article Journal of Risk and Insurance

The Impact of Insurer Name Changes on the Demand for Insurance

Academic journal article Journal of Risk and Insurance

The Impact of Insurer Name Changes on the Demand for Insurance

Article excerpt

INTRODUCTION

A firm's reputation, the quality of its products or services, and the public's perception of the organization jointly impact whether the firm's name adds or detracts value. (1) While firms often spend considerable sums to build name recognition, corporate name changes have occurred frequently since the early 1900s. The extent of name change activity in the United States is documented by Wu (2010), who finds that 30 percent of publicly traded companies have experienced at least one name change since 1925.

The prior literature indicates that name changes can impact perception and the overall economic performance of the firm. These studies typically focus on publicly traded firms and investigate the response of investors by examining stock price movement around the announcement of the change (e.g., Bosch and Hirschey, 1989; Cooper, Dimitrov, and Rau, 2001; Kadapakkam and Misra, 2007; Wu, 2010). These studies yield important findings, yet the focus on stock price results in a number of significant limitations. First, because stock prices are required for these studies, the samples are limited to firms that are publicly traded, which represents only a small percentage of the firms operating in the United States. (2) Second, by examining stock price movement to determine the impact of name changes, prior studies are not able to distinguish between increases in revenue versus increases in efficiency and/or reductions in cost. In other words, while studies commonly document a positive market response to the occurrence of a name change, such a response should ultimately result from investor expectations of an increase in discounted future cash flows, which will be driven primarily by increases in revenue, improvements in efficiency, and/or reductions in cost.

By focusing on name changes in the U.S. property-casualty insurance industry, we are able to overcome some of the limitations in the prior literature. In the current study, we use statutory financial data to examine the impact of corporate name changes on property-casualty insurers. (3) Because data are available for multiple ownership structures, it allows us to test the impact of name changes across various organizational forms rather than focusing only on those firms that are publicly traded. (4) There also have been a significant number of name changes within the property-casualty insurance industry, thus providing a relatively large sample (5) to examine the impact of name changes without the potentially confounding effects that could result from including firms across various industries (e.g., Horsky and Swyngedouw, 1987). Finally, the use of insurer premium data allows us to add to the existing literature by providing evidence on whether name changes are revenue-increasing endeavors for the firm and whether consumers specifically respond to name changes.

As a preview of our results, the vast majority of insurers with name changes experience only one name change during the sample period. In addition, most name changes occur in the absence of other corporate changes tracked by A.M. Best, suggesting the motive for name changes extends beyond an association with contemporaneous corporate events. (6) Our empirical results indicate that insurers who change their name experience significantly higher premium growth in the following year when compared to insurers that did not undergo a name change. Our finding of a positive reaction to a prior-year name change is independent of any other corporate change the insurer may be experiencing, as tracked by A.M. Best. Thus, the results suggest that insurers generally benefit from name changes and that the positive market response to these changes reported in prior studies may be driven by expectations of increased revenue.

The remainder of the article is organized as follows. We first review the literature regarding the reasons firms change names, the process and costs associated with name changes, and the implications of those changes. …

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