Convergence capital isn't a flash in the pan, reinsurance market observers agree.

While the amount of capital committed to insurance-linked securities may ebb and flow with investment market conditions, catastrophe bonds and other ILS products will remain permanent features of the reinsurance marketplace, they say.

Part of the reason is the rise of pension funds and other longer-term investors as large sources of ILS capacity. While hedge funds were early capital providers, they have largely cycled out of the market as pension funds — searching for investments uncorrelated to their existing stock and bond portfolios — have taken a larger role.

Institutional investors — including pension funds — accounted for 41% of global ILS capacity for the 12 months ended June 30, 2013, up from 34% a year earlier, according to Aon Benfield Securities. State catastrophe funds provided a slightly larger share at 43%, but that share shrank from 51% in 2012. Mutual funds provided 12% of 2013 capacity, while hedge funds and reinsurers — amid shrinking yields on cat bonds — provided only 2% each.

Hedge funds are opportunistic, shorter-term investors that are likely to leave the market when yields are low and return when they rise.

Pension funds, on the other hand, have spent several years studying ILS risks and are likely to remain in the market for the long haul, even if the benign catastrophe loss picture changes or rising interest rates make other investments more attractive, sources say.

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“They've done an enormous amount of due diligence,” said Rick Miller, managing director with Towers Watson Capital Markets Inc. and co-head of its ILS practice. “Once they have decided, it's not like they are going to abandon the asset class when a catastrophe event happens.”

“Even in a rising interest rate environment, I think they are still interested in this,” said Paul Schultz, chief executive of Aon Benfield Securities in Chicago.

The ILS market draws on two general sources of capital, said Greg Hagood, a Nashville, Tenn.-based co-founder of ILS fund manager Nephila Capital Ltd. One is strategic investors, including pension funds, that may adjust their allocations to ILS funds in response to relative returns on investment but which will maintain a position in the market.

These investors “will just dial up or dial down based on market conditions,” he said.

The other source is what Mr. Hagood referred to as “accordion capital,” which enters and leaves the market quickly as needed.

ILS structures make more investment sense than the more expensive option of capitalizing a startup reinsurer in the wake of a large-scale catastrophe, because that reinsurer may find itself with excess capital when market conditions soften, he said.

“I think it's a much healthier mechanism for these peaks and valleys,” he said.

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Some observers express uncertainty about the impact of a big catastrophe event or rising interest rates on the inflow of capital to ILS funds.

It's unclear, for example, whether the ILS market will continue to grow at its recent rapid pace if other investment options start to look more attractive, said Joe Calandro, managing director with the insurance practice of PricewaterhouseCoopers L.L.P. in New York.

While capital may ebb and flow from the market, though, ILS funds are here to stay, he said.

“These things are not going to disappear,” Mr. Calandro said.