The Australian life insurance industry continues to face a gloomy outlook, according to a new report from Moody’s.

Lapse rates grew steadily from 2011-13 but fell slightly last year, “which we attribute to efforts by some insurers to strengthen their customer-retention practices, improve their pricing levels and promote policy renewals”, the ratings agency says.

“Our assessment of the problems with premiums and commission structures is in line with a report published by the Australian Securities and Investments Commission.”

Moody’s Senior Analyst Frank Mirenzi says high lapse rates “largely reflect a combination of fundamental issues, including product mispricing and premium and commission structures. These issues will take time to address.”

The report says lapse rates – despite last year’s decline – will continue to put pressure on industry profitability in the next couple of years.

“As policy lapses increase, the average duration of policies shortens, which means life insurers may not earn the full level of expected profits from those policies. Higher levels of claims could also lead insurers to revise up their assumptions on future claims and consequently to reduce their future profit expectations.”

Mr Mirenzi says larger life insurers such as the banks, AMP and TAL are most at risk from falling profits, due to them competitively growing life books in recent years.

However, companies such as AMP, MLC, OnePath and BT may withstand the pressure from poorly performing life businesses, because they have diversified product ranges including super and wealth products.