Posted by De_Trainer | Posted in
The Canadian insurance companies have advertised segregated funds as an investment vehicle that is similar to mutual funds and one with a life insurance security. It may be mentioned here that segregated fund is an investment type and is under the administration of Canadian insurance companies and are made available in the form variable or individual life insurance contracts.
The Office of the Superintendent of Financial Institutions or OSFI has urged life insurance companies in Canada to slow down the sale of segregated funds as they are associated with a number of risks. Quoting the OSFI head Julie Dickson “Selling more segregated fund policies does not reduce risk, it actually increases it, because when the markets decline all segregated fund policies get hit at the same time”.
The head of OSFI suggested that the Canadian insurance companies selling life insurance policies and dealing with segregated funds should take few steps to reduce the risk associated with these funds. The measures suggested by her include “changes to product features, slowing growth in the product line, making sure that valuation assumption are consistent with the intent of capital rules, and hedging or other types of risk mitigation, including reinsurance”.
The value of the segregated funds is influenced by the prevailing market conditions that include the “value of underlying securities”. This makes the segregated fund risky and is more susceptible to a market collapse. The head of the Office of the Superintendent of Financial Institutions stated that there are 2 risks associated with the segregated funds. The first includes the liabilities that depend on the movement of the market and the second one includes funding the liabilities.
The segregated funds are also known as “mutual funds with an insurance policy wrapper”. They are usually sold by insurance representatives having license for the same. Segregated funds combine the benefit of a mutual fund along with life insurance coverage.
Contributed by Ampminsure Community Member.