On the Origin of Mortals

Part I: Magic and the Origins of Life

The world started as basically a ball of magical chaos. Order was brought to the world when concentrations within the storm of energy formed sentience and started creating areas of stability. Those purely magical forms created servant species, which are also inherently magical. This includes, among others, Dragons and Elves. Over eons the titans managed to bring nearly complete stability to the world. This also includes the creation of "lesser" species of life (eg animals, plants, etc).
The inherent magical nature of the world still exists as a form of "background noise" that beings with a strong connection to can manipulate - this is the nature of Magic in the setting. Magic is created through intent and focus - any sentient being can do it, some just have a stronger connection to it and thus find it easier. Dragons and elves, being largely made of magic itself, can almost casually use it. At some point in their history, however, the Giants suffered a cataclysm that brought their existence to an end.
An age passes and the dragons and elves (and a handful of others) build their own civilizations.

Part II: Mortals

Over this time, mortal, sentient species arose over time through something akin to evolution. As intelligence evolved, a connection was formed between intelligence and magic, and souls came into being. A soul is the spark of connection between a mind and the natural magical energy that permeates the world. It forms the core of an individual's personality, their outlook, and their ability (consciously or otherwise) to create magic. Thus, mortal magic (whether the Mages, clerics of The Virtues, Orc shamans, or Ratling blood casters) is driven by the powerful intent of a mortal, drawing magic through the strength of their soul. It requires training and focus and intent to create purposeful magic, so most don't.
This is why Sorcerers can be so dangerous in the current time. Due to their more powerful connection to magic (inherited from draconic ancestors) they are more easily able to tap into magic and create effects - and thus are more likely to do so unintentionally. Their strong connection causes their emotions to drive magic more than specific intent.

Part III: Let's talk about Sex

Or more specifically, reproduction. A new life is formed partially from standard biological reproductive methods. But that life cannot/will not be created without the spark of a soul being created along with it. And the creation of that spark will only occur through intent. This isn't a thing that people "know" (though possibly certain more spiritual people like orcs might suspect it, and more academically minded mages certainly have done some research on the subject) but the core of creation that lives within every sentient being is what connects them to lives besides their own.
What this means is that a new life is formed only when the intent to create it (subconsciously or otherwise) is included in the actions that lead to it. Intentional "hey let's make a kid" energy needs to be there for that to happen. Because that's what's needed to create the connection between the soul(s) of the parents to create the spark of a soul in the new life. This means that casual sex is largely inconsequential. Well, as far as life creation goes, anyways.
But it does not require both participants to have the intent. And this can lead to some very specifically dark/traumatic stories/origins. Children unwanted by one parent will exist, whether through manipulation, deception, or force. The next section will go into why THAT matters (outside of the obvious violations that come from the act). Important note: never ever ever incorporate those traumatic stories into your games without the consent of all involved.

Part IV: The Nature of a Soul

An individual's soul forms the template of their personality. A child born from good intent, from parents that are comfortable together, that want to create a good life together... this will generally cause a good-natured child to be born. This doesn't mean they'll automatically be a "good person" - a soul is just a template from which life experience will build upon - but they will certainly be inclined that way. In the other direction, a child born of force/coercion/deception or from parents who are just "carrying on the bloodline" will have a "template" of a darker nature. Again, this will not rule their lives, but it will certainly put them in a poor starting position.

Part V: What Comes After

When a life ends, a person's soul departs their body. Then, a few things can happen, depending on their life, their nature, the way they died, etc.
At base, a soul will linger around for a little while. It experiences a sort of euphoric state as it is touched by the magical nature of the world. If the person is resurrected through magic (which largely just shunts the soul back into their body) they won't remember that time, but it does sort of invigorate them. Most people will describe it as a "near death experience" that gives them a new desire for life.
Assuming, though, that a soul is not returned to the body, there are a few different paths that can be taken. At base, a soul will simply dissipate back into the magical energies of the world. A soul is pure magic, and without a mind to keep it present, it will simply return to that purely magical state.
Some individuals may have led a life, though, that was so focused on some aspect that their soul carries an abundance of that energy with it. When this occurs, the soul can itself manifest into another magical life form. This is exceptionally rare, and most often occurs (for humans, at least) through extreme devotion to the Virtues or an exceptionally vice-fueled life. Virtueborn and Viceborn are what result from this "ignition" of a soul upon death.
Souls that have formed a particularly strong sense of attachment, regret, or pain, can find themselves anchored to the world in some way. This is the origin of several kinds of undead spirits such as ghosts. The spirits in general will still gradually dissipate over time based on the strength of the connection to the world. Finally, it is possible that a soul will have become ensnared in a bargain with the Fae. This can cause any number of effects to be enforced upon the soul in question.