When we're analyzing the profits generated from life insurance business, it can be helpful to break it down into the different profit drivers within the business. A key starting point for this is therefore, to think separately about the different sources of profit for an insurance company. Those that arise from the insurance activities and those that arise from the investment activities. Let's start off with the insurance activities. Now, clearly, life insurance business spans many years. So, the insurance profits in any given year is a blend of the profits generated by business written in previous years, and the profits generated by business written in the current year. The business written in the previous years is referred to as existing business or sometimes enforced business. Whilst the business written in the current year is new business. And this is a helpful way to split the profits. Analyzing the existing business profits separately from the new business profits. Now, let's think about the existing business. Where do the profits arise from here? Well, many of the premiums and assumptions used, which will drive these profits were set when the policies are written. So, a large part of the profits is just mechanical resulting from the premiums flowing in and the benefits flowing out as expected. However, if these premiums or benefits are higher or lower than expected, let's say because mortality rates differed from expectations or because the number of policy lapses or surrenders were higher or lower than expected, this would drive profits up or down. So whether cash flows are materially higher or lower than expected, this leads to a gain or loss in earnings. And these gains or losses are referred to as experience gains or losses, cuz they reflect the actual experience of the insurance company compared with their expectations. Now, let's think about new business. Clearly new business is essential to growing the profits of an insurance company, and therefore new business is an important source of profits. This new business reflects current market conditions but will generate profits for many years, so provides a leading indicator of future profits. The economics of this new business is therefore closely monitored, particularly in terms of the volume of new business, the premiums written, but also in terms of the pricing of these products. Now, because pricing can be very product-specific and also region-specific, new businesses typically analyzed by both products and regional split. Now let's think about the investment activities. Now, clearly, a large part of this will be dependent on the market environment, which will determine the general level of investment returns. However, within this, the investment allocation can have a material impact on the returns, particularly, relative to the interest cost on the insurance liabilities. Typically, life insurance companies seek to match the investments that they have against the profile of benefit payments by investing heavily in long-term low-risk sovereign bonds. Whilst this should ensure that investment returns are resilient regardless of market conditions, it's impossible to fully-hedge against all types of risk. So there will always be some residual risk. Now, taking a step back from all of this, we can actually see that a life insurance company's profits are derived from a range of sources and each of these sources have their own drivers. And this is really important when we're starting to think about forecasting the revenues and profits of a life insurance company.
