IN RECENT YEARS THE BUSINESS of lending has converged with that of insurance: Banks can insure the loans they make against default; securitization, which allows for risk to be divided up and parceled out, borrows much from traditional insurance practices; credit-risk models emulate actuarial calculations; and the risk premiums on loans aren’t much different from the policy premiums charged by conventional insurers.Insurance, like lending, is a highly cyclical business. When premiums are high and losses low, capital flows into insurance. But over time competition drives down policy rates. Premiums decline to the point where they are insufficient to cover liabilities. A crisis occurs that can only be resolved through losses and capital contraction. Something along those lines occurred at Lloyd’s of London in the late 1980s. The Lloyd’s catastrophe should have provided a cautionary tale for those who sought to revolutionize the financial world by turning the provision of credit...