How does the credit risk of the issuer affect segregated funds?

The influence of credit risk on segregated funds is primarily linked to the ability of the issuer to meet its financial commitments, particularly regarding the guarantees associated with these funds. Segregated funds are investment products offered by insurance companies that provide certain guarantees against loss, such as a minimum death benefit or maturity value. If the issuer faces financial difficulties or insolvency, there is a significant risk that they may not be able to honor these guarantees.

The credit risk of the issuer is crucial because it directly impacts the security of the investment and the reliability of the promises made to policyholders. A higher credit risk suggests that there's a greater chance the issuer might default, which can lead to investors losing the guarantees that make segregated funds appealing in the first place. Therefore, understanding the issuer's creditworthiness is essential for evaluating the overall risk associated with investing in a segregated fund.