Description: The selection of the economic capital calculation approach becomes more of a modeling decision. Now let us pause here and think about the arbitrage-free assumption at the beginning. At any time, there can be only one price on any asset. If the company considers the price calculated above as the fair price for its products, then it must hold true that the same price has to be arrived at if the company uses a real-world pricing approach instead of a risk-neutral approach. This gives us a very good basis to calibrate the appro- priate economic capital.

Description: Actuaries are accustomed to considering how much conservatism is appropriate in their estimates, whether made for pricing or for mea- surement of liabilities. In the proposals for a new standard on accounting for insurance contracts, this conservatism is referred to by the International Accounting Standards Board IASB and the Financial Accounting Standard Board FASB of the United States as the risk adjustment.

Description: A discussion of the need to connect the interrelated requirements of reserve requirements, capital requirements, risk management, IASB requirements and so forth.