The freefall lifeboat is designed to be launched by dropping from a ramp directly into the sea.
For the purpose of the drill, the boat had been lowered using a galvanised wire lifting sling.
Four crew members boarded the lifeboat before it was hoisted back on board the ship.
As it was just clearing the stern railing, one of the four wire ropes snapped, followed by the three more in quick succession, plunging the boat several metres into the water.
The TAIC investigation found all four wires had been significantly weakened by severe corrosion, caused by sea water accumulating under the plastic sheathing.
The sheathing prevented access and maintenance of the wire, and served no purpose other than to protect the coating on the lifeboat.
The report said since the incident, the manufacturer had stopped encasing the ropes in sheathing and ordered it to be removed from existing lifeboats.
The owner of the Da Dan Xia has also removed the sheathings from its 22 other ships.