What's ahead in 2007? BI offers 'ins' and 'outs'

EACH NEW YEAR brings an opportunity to look back at the past year as well as ahead to what may be in store. Continuing a long tradition, Business Insurance offers our predictions on what will be "in" and "out" in risk management and employee benefits during 2007.

We acknowledge weaknesses in our prognostications, but several of our predictions at the beginning of last year proved correct. Here's what we got right.

Comprehensive pension funding reform had long been on employers' list of unfulfilled wishes, but we thought Congress would finally deliver in 2006--and it did. In August, the Pension Protection Act ushered in the most sweeping set of reforms since the Employee Retirement Income Security Act of 1974.

We believed policyholder litigation over the cause of hurricane losses would occur, and that also came to pass. Most courts have so far ruled in insurers' favor, though, and the Mississippi attorney general announced last week that he would welcome an out-of-court settlement with the major homeowners insurers even as he succeeded in getting the case moved back to state court (see story, page 3).

After the record year for hurricane losses in 2005, it was easy to predict that rates for catastrophe-exposed risks would rise a lot. In fact, they not only went up by double digits, on average, last year, but continued to rise as policies renewed throughout 2006.

In a related development, criticism of cat models suggested that the modeling companies would enhance their products. That, too, occurred as Risk Management Solutions, EQECAT and AIR Worldwide all tweaked their algorithms.

We thought retrocessional reinsurance coverage would be in, but it looked as though we were wrong until late in the year. Several companies established offshore vehicles to provide sorely needed retro capacity, which the hurricanes in '05 all but wiped out.

Business Insurance missed the target in other areas, however.

We thought that discussions of extending the Terrorism Risk Insurance Act would die in 2006. But the November elections that brought Democrats into the majority revived the chances that TRIA will survive.

Employers' interest in defined benefit plans still wanes, but we wrongly predicted such pension designs would virtually disappear. The massive Pension Protection Act was a shot in the arm of defined benefit plans and put hybrids, such as cash balance plans, back on the table.

Layoffs by major brokers continued in 2006, against our expectations. And softening rates in most lines of business will give impetus to further cost-cutting.

After aggressively pursuing brokers and insurers during 2005, we figured Eliot Spitzer would lose interest in the insurance industry last year. Not quite. He continued his war on contingent commissions by focusing on insurers. 2006 saw a string of settlements by some of the largest commercial lines insurers, led by American International Group's $1.64 billion agreement. Mr. Spitzer remained active in investigating the industry right up until New Yorkers elected him governor, and his successor vowed to continue the course his predecessor set.

Above are some forecasts for what may be "in" or "out" in 2007.

IN for 2007

Cash balance plan conversions

Competitive insurance market conditions

Consolidation among PBMs

Extension of TRIA backstop

Gradual growth in consumer-driven health plans

IPOs for Bermuda startups

M&A among large brokers

More hurricanes, after 2006's welcome respite

States promoting universal health care

OUT FOR 2007

Adequate capacity for coastal property risks

Discussion of a federal program for funding catastrophes

Drive to eliminate contingent commissions

Expansion of alternative risk transfer market

Legislation mandating large employers' health care spending

Strict reinsurance collateral rules for all alien reinsurers

Steeper increases in health care costs

Underwriting discipline in most lines