Rising lapse rates for the Australian life insurance industry will impact profitability of the sector in the future, according to a new report by Credit Suisse.

Its Life Insurance Annual Report notes term life lapse rates are continuing to rise and have now reached new highs.

Credit Suisse has put term life lapse rates at 13.4% at the end of 2010 compared to 10.6% fours years ago.

TAL (formerly Tower Australia) is also experiencing high lapse rates, which the report attributes to its extensive third-party distribution – a channel which is also expected to lift MLC’s lapse rates with its Aviva acquisition.

“A key driver of future profitability will be the impact of rising lapse rates across the industry,” the report says.

“Most (life) companies have highlighted this as an issue and something that they are addressing but as yet there is no clear evidence of success.

“Given the high initial commissions and set-up costs, life insurance profitability is highly sensitive to lapse rates.”

Despite increasing lapse rates, the industry continues to grow, recording an average rate of 12.7% per annum for the past four years, Credit Suisse says.

One factor in this growth has been the expansion of the group life insurance market, with a 17% increase in premiums during 2010.

Annual group life inforce premiums reached $3.3 billion in 2010, the report says.

The fastest growing life insurers in the group life market are AIA and TAL, with the latter reporting 40% growth in premiums during 2010.

TAL inforce premiums are now in excess of $250 million for the group life market compared to about $100 million for AIA.