The FCA has proposed tough new rules to prevent insurers from overcharging customers when their home and car cover policies are renewed.

The regulator says that by tackling the so-called “loyalty penalty” it expects to save consumers £3.7bn in premiums over the next 10 years.

However, critics have warned that while the measures are likely to result in lower costs for vulnerable customers and those who never switch, savvy consumers who shop around every year may end up paying more as they will no longer benefit from insurer’s current teaser pricing model.

Under the new proposals, insurers must offer existing policyholders the same price that they would charge new customers at the point of renewal.

Currently most insurers offer their lowest deals to new customers and then ratchet up their pricing year on year, hitting those who stick with the same provider hardest.

The rules would not prevent insurers from increasing premiums if a customer’s risk factors have changed over the course of the year or if the insurer itself has altered its pricing strategy or margins.

But insurers would no longer be able to charge existing customers more than a new customer who presented to them with the same scenario.

Insurers will still be allowed to price differently through their various distribution channels, but firms will be required to conduct governance over their products to ensure they offer fair value over time.

Distributors, such as brokers, will also be required to ensure that their own practices and pricing do not result in harm for consumers.

The FCA is also proposing that firms must make it far clearer to customers that there is an extra cost to paying monthly rather than annual premiums.

Insurers will have to monitor whether the cost of finance they offer to customers who pay monthly is comparable to interest rates available elsewhere in the finance industry.

The FCA says firms must ensure that they are “not influenced by remuneration” to charge high rates of interest on monthly insurance.

Insurers will also have to make it easier for customers to stop their policy from auto-renewing, giving them the choice of cancelling by phone, email, online or by post.

FCA Interim chief executive Christopher Woolard says: “We are consulting on a radical package that would ensure firms cannot charge renewing customers more than new customers in future, and put an end to the very high prices paid by some long-standing customers. 

“The package would also ensure that firms focus on providing fair value to all their customers. 

“We welcome feedback on the proposals.”

The consultation on the changes will run until January 25, 2021