Sensible Insurance Company Case Summary

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Sensible Insurance Company is a mid-sized insurance company whose core product is group term life. Group term life is a one-year rate guarantee contract with premium paid monthly. However, Mammoth Mart requested a three-year rate guarantee on the premium. Furthermore, it will pay the entire three years’ premium up-front based on its current workforce and salaries, with monthly adjustment based on the fluctuation to the covered salary amount. As you aware, addition of Mammoth Mart will almost double the number of insured lives Sensible covers. In view of the above, I recommend a conservative portfolio for Sensible with the strategic asset allocation for investment as table below.

Table 1 – Strategic Asset Allocation

No Investment Type Weight Expected Return Weighted Expected Return
1 Short-Term Treasury Bills 40% 4.9% 2.0%
2 Long-Term Treasury Bond 20% 6.3% 1.3%
3 Long-Term Corporate Bond 20% 6.8% 1.4%
4 Stocks 20% 9.2% 1.8%
5 Commodities 0% 9.8% 0.0%
Portfolio Expected Return 6.4%
Portfolio Variance 0.2%
Portfolio Standard Deviation 3.9%
Portfolio Coefficient of Variation 0.61
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The main goal of the recommended conservative portfolio is to protect the principal value of Sensible’s portfolio. Due to business nature of Sensible which heavily focus on Group Term Life, it is important to ensure that Sensible will be able to fulfill its obligation to pay claim in a shorter time period by preserve a large portion of its capital. Therefore, the recommended investment strategy is best for Sensible with a shorter time horizon and low level of risk

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