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📈 '''Source of earnings analysis''' is a financial reporting technique used primarily by [[Definition:Life insurance | life insurers]] to decompose total earnings into their underlying components — such as [[Definition:Mortality | mortality]] gains, [[Definition:Morbidity | morbidity]] gains, investment income spreads, expense margins, and the impact of assumption changes or model updates. Rather than presenting a single profit figure, the analysis reveals which operational and financial drivers are generating or eroding value, giving management, [[Definition:Rating agency | rating agencies]], and [[Definition:Regulator | regulators]] a transparent window into the economics of an insurance portfolio. The technique has particular prominence in Canadian insurance regulation, where the Office of the Superintendent of Financial Institutions (OSFI) has long required it as part of mandatory financial disclosures.

🔎 The mechanics involve attributing the insurer's total after-tax income to distinct sources. Expected profit from in-force business — the margins built into existing policy liabilities — forms the core recurring component. Deviations from expected experience, such as actual [[Definition:Claims | claims]] being lighter or heavier than assumed mortality or morbidity tables, are captured separately as experience gains or losses. [[Definition:Investment income | Investment returns]] above or below the rates assumed in liability valuation appear as investment variances. New business gains reflect the profit recognized when policies are written at margins above the cost of capital. Finally, the impact of changes in actuarial assumptions, model refinements, and management actions is isolated. Under [[Definition:IFRS 17 | IFRS 17]], which became effective in many jurisdictions in 2023, a related concept emerges through the [[Definition:Contractual service margin (CSM) | contractual service margin]], which stores unearned profit and releases it over the coverage period — effectively formalizing one of the components that source of earnings analysis has tracked qualitatively for decades.

💡 For senior leadership and boards, this analysis transforms financial reporting from an opaque bottom line into a strategic dashboard. If mortality experience consistently outperforms assumptions, the [[Definition:Actuary | actuarial]] team may recommend strengthening reserves or adjusting pricing to avoid regulatory or competitive risk. Persistent negative investment variances could prompt a review of the [[Definition:Asset-liability management (ALM) | asset-liability management]] strategy. Investors and [[Definition:Equity analyst | analysts]] increasingly expect this level of transparency, especially as IFRS 17 adoption broadens global comparability across life insurers in Europe, Asia-Pacific, and other adopting jurisdictions. In markets that have not formally mandated source of earnings disclosure — including parts of the United States, where [[Definition:US GAAP | US GAAP]] governs statutory and GAAP reporting — forward-thinking insurers still prepare internal versions to support capital allocation decisions and embedded value reporting. The analysis ultimately bridges the gap between accounting results and economic reality, making it indispensable for any life insurer seeking disciplined growth.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:IFRS 17]]
* [[Definition:Contractual service margin (CSM)]]
* [[Definition:Embedded value]]
* [[Definition:Asset-liability management (ALM)]]
* [[Definition:Actuarial assumption]]
* [[Definition:Life insurance]]
{{Div col end}}

Definition:Source of earnings analysis - Revision history

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