Motor and home insurers have been warned by the regulator that they must compensate loyal customers if they overcharge them.
From today, insurers can no longer increase prices for customers renewing their policies while enticing new shoppers with loss-making cheap deals.
The Financial Conduct Authority has warned it will be keeping “a close eye” on how insurers treat customers under the new rules.
Insurers have until January 17 to set out new prices – however, they must compensate any customers who are overcharged and suffer a loss before then.
The ban on “loyalty penalties” is expected to save customers a total of £4.2bn. Individual households could be up to £200 better off each year.
The practice has been rife in the insurance industry for years. Previously, most car and home insurers lured customers in with a cheap deal – on which the firm normally makes a loss – and then hiked prices remorselessly every year they renew.
This practice has now been outlawed, forcing insurers to offer consumers the best price available in their risk bracket regardless of how long they have been a client.
Gareth Shaw, of Which?, a consumer website, said insurance companies had been “getting away with luring customers in with low prices before hitting them with huge price hikes”.
He added: “The regulator must continue to monitor insurance firms to ensure they don’t find new ways to exploit customers’ loyalty, and it should be prepared to take further action where necessary.”
The FCA said 10 million home and motor policies were held by people who had been with their insurer for five years or more.
Savvy customers who shop around for the best deal once their policy comes up for renewal will also suffer. People who frequently switch providers in a bid to benefit from the loyalty penalty will no longer be offered preferential prices. It is likely that insurers will recover some of the losses on premiums for longstanding customers by increasing those for new ones.
Previously, new car insurance customers could get premiums around 23pc cheaper than those for existing policyholders. New home insurance customers could usually access deals at nearly half the price of those renewing.
Mr Shaw added: “People should still shop around and challenge their insurer to offer them the best deal possible – and if not, be prepared to switch.
“There are good tactics to drive down the cost of cover: checking multiple comparison sites as well as insurers that aren’t listed on them, adding named drivers or considering multi-car cover, and playing around, truthfully and accurately, with occupation when getting a quote.”