Aon Benfield’s Reinsurance Market Analysis describes the participants as having “reached the end of a 15 year journey, featuring chronological stages of alternative capital’s significance, completion and finally disruption.” From the interviews with two  reinsurance industry executives that seems to be disappating.

Mike van Slooten, Head of Aon Benfield Analytics market analysis, pointed out that the term “alternative capital” has already passed into history. It’s been overtaken and replaced by insurance linked securities (ILS), and it’s become an integral part of the reinsurance market.

Another report from Aon Benfield points out that as of December 31, 2014, total catastrophe bonds on-risk stood at $24.3 billion, “representing another record for the market and an 18 percent increase over the prior year period.” ILS capital now accounts for $62 billion of the estimated $575 billion in total global reinsurer capital.

“The providers of reinsurer capital have also changed,” Van Slooten said. There are now fewer hedge funds and other more or less “short term” investors in the reinsurance market, as pension funds, endowment funds and other long term investors have taken positions in reinsurance. They now back the majority of the cat bonds and collateralized reinsurance that is placed in the market.

In a separate interview James Vickers, Chairman of Willis Re International, concurred. Venture capital, hedge funds, those that were in it for the ‘quick buck,’ are mostly gone, he said. Long term investors have replaced them. “They provide better quality, and they operate on a 30-year investment cycle. ILS is here to stay.”

The word “cycle” has historically had negative connotations for the reinsurance industry, as it described the “hard market/soft market dichotomy, which has been the norm up until recently. Vickers explained that the investors now funding ILS in the reinsurance market are ” well-informed and sophisticated,” and their presence would actually “smooth out the cycle, and make the swings less severe.

“They are quality players,” he continued. “They’re more stable, and the operate more like [traditional] reinsurers; they have their own paper and a different capital base.” In fact their capital is huge – hundreds of billions – so that even a substantial ILS investment – $2 or $3 billion – represents a very small proportion of their capital – less than one percent. As a result, Vickers explained, “a major loss is less probable, and actually provides an opportunity.”

Van Slooten indicated that even a $100 billion loss probably wouldn’t be enough to discourage non-traditional reinsurance investments. “They will come back,” he said, “as the investment returns are still greater than corporate bonds; it’s also a fragmented market, and there’s money on the sidelines [looking for investment opportunities].”

While the reinsurance market has more or less stabilized, it nonetheless faces some serious difficulties. Van Slooten pointed out that between 90 and 95 percent of the ILS market is invested in property catastrophe reinsurance products; 70 percent of which are in the U.S. “ We need to look for ways to expand the market,” he said, ”we don’t have enough product.”

Expansion, whether geographically or by introducing new products will not be easy. Primary carriers, bolstered by greatly improved catastrophe models, are retaining more risk and buying less reinsurance. Reinsurers generally have a lot less capital than the larger multinational companies, who are more frequently choosing to retain their own risk and becoming self-insured. While there are more and better models for the U.S. and Europe, in many parts of the world – including countries with a great deal of catastrophe risk – the models are primitive or non-existent. They are so far too risky for ILS investors.

“We need to grow the insurance markets [in those countries], and make the insurance industry more relevant [to their needs]. The industry really doesn’t sell itself, but only big companies can do that,” Van Slooten said.

Vickers suggested one avenue that should be further explored – private/public cooperation. “It’s an obvious solution,” he said, “but it’s not easy to do.” There have been successful efforts. Vickers described the establishment of a program in Turkey to identify preventative measures to address the risk from earthquakes in the country. It involves trying to bring together legal requirements, taxation, regulations and providing “seed funding” as required.

“It’s the right thing to do,” Vickers said, “but it needs the support of the international community.” Convincing politicians to engage in long term – 20 or 30 year projects – is especially difficult given their predilection to look ahead only as far as the next election.

Willis has assumed a leading role in efforts to bring together the politicians, insurers and others to provide shared solutions. The Group’s Rowan Douglas organized presentations at the International Insurance Society Conference in London last summer, acting in his role as chairman of the UN HFA [Hyogo Framework for Action].

The reinsurance industry’s failure to grow significantly has drawn the attention of the rating agencies – all of which have a negative outlook on it. This doesn’t mean that there will be massive downgrades; however, “it will increase the pressure on management teams to make their franchises stronger,” Van Slooten said. One way to do that is to consolidate companies through mergers and acquisitions (M&A), which he expects will increase.

Neither Vickers nor Van Slooten is expecting major changes in the re/insurance industry in 2015. Vickers noted that “although there wasn’t much growth in 2014, underwriting results “were O.K.,” mainly due to the lack of significant loss events. Profits were also in line with expectations, but in most cases reserve releases played a significant role, which, Vickers said, isn’t guaranteed to continue in the future.