It's not so much balance unless you mean making crafters more relevant. I agree that it doesn't help - getting an uber weapon and then never losing it, never having it really wear out, etc. does change things.
People complain about WOW forcing you to move on through weapons and armor - either because you're moving up another level and better gear becomes available, or because you really don't have a way to store a lot of things (although Blizzard changed that recently), but there is a method to their madness.
I know what possessed the UO team back in the early 2000's to make items virtually indestructible, but when they did it, I doubt they thought about the long-term implications.
Well, I would say there are a few design holes in terms of how systems work in regards to items but in general, yes, everything is much more balanced with item loss because the power level of items used over all is much lower, the player skill and in game skill value increases. And if someone wants to still run a 20 million dollar suit, then they deserve to have that edge, because they are putting their wealth against their ability to keep alive, which if you ask me is how it should be.
I think if you made a few tweaks in drops, various skills and combat in general, then simplified item properties a tich, and then replaced insurance with very limited (read 1 or 2 blessed items per character) item protection I think the game would be very very balanced and more fun in general to play.
As for WOW, the thought process there is simple. People get jazzed by having clear cut goals laid out ahead of them, and achieving those goals. It gives you a chemical kick of satisfaction. WOW is built around that repetitive goal/accomplishment type of game play, much like facebook games are. I think thats fine really, but it's not the sort of game I would want to devote any time to.
UO changing to no loss basically never break item as well is no mystery. Its what people want. People get attached to their bits and bobs and it stresses them out to lose them. I won't criticize anyone who feels that way, even if I don't understand it, but like it or not there are downsides to that kind of system. I would argue bigger downsides than full loss, personally.
To me multi player games should be less about accomplishment (built in accomplishments like levels and leveled armor sets etc anyway), and more about adventure and player interaction.
The interaction and the community were the best parts of uo at its peak pre ren (and a short window on siege in like...08). People had to interact and work together, and it was about having a fun day, not collecting uber item x. I think games need to get back to that sort of design.