On developments in risk management in 2005:

1) Four hurricanes in six weeks causing over $30 billion in damage. The insurance industry appears to be holding up well in the face of what will surely be the greatest insurance loss to date, but Katrina will have a lasting impact and may reshape the industry, accelerating the integration of insurance and the capital markets.

2) The nearly simultaneous downgrade to junk status of Ford and GM debt in May. This roiled the booming credit derivatives markets and heightened awareness of weaknesses in existing methods for measuring credit risk in portfolios of corporate debt.

3) The price of a barrel of crude oil breaking $70 in August. It has recently come down to around $57. This type of volatility in energy prices poses a major risk management challenge for virtually every industry.

What's ahead?

1) We will see some reshuffling as some investors pull out of catastrophe risk financing and others move in. The parallels between what we saw in New Orleans and a potential terrorist attack may also lead to more calls for government backstops for disaster insurance.

2) Models used by banks and broker-dealers in the credit derivatives business will become more sophisticated in response to growing dissatisfaction with existing, somewhat simplistic models. (This is an area where academic work can have immediate impact.)

3) Starting in February 2006, new rules adopted by the U.S. Securities and Exchange Commission will require the registration of hedge funds, which have previously operated in relative secrecy. The SEC's objective is to reduce opportunities for fraud, but the policy change also raises the possibility of greater regulation of the industry. However, hedge funds can avoid registering by requiring investors to keep their money locked up for at least two years. So debate over transparency in the industry will continue.