Are ILS investors repeating the mistake of ‘Lehman’?

Prior to 2008 the standard Cat Bond collateral structure was using a total return swap (“TRS”) with the structuring investment bank. The investment bank invested the collateral into securities of their choice, subject to certain constraints, and swapped the interest rate into LIBOR and guaranteed repayment. Over time and little by little the collateral security requirements were weakened, as with all structured finance products, and the investment banks had greater scope. A cynic may say that the investment banks were given cheap rolling finance from the TRS product.