From January 1, insurers will no longer be able to charge existing customers more to renew than they would charge new customers.
The new rules are being brought in by the Financial Conduct Authority (FCA) and are expected to save consumers £4.2 billion over the next 10 years.
The reforms come after a review that found many insurers were increasing prices for renewing customers each year, a practice known as ‘price walking’.
As well as being unfair to loyal customers who would end up paying more, it is also said to have distorted the insurance market as a whole. This is because many firms would offer below market value to entice new customers in before charging them higher prices in the long run.
Insurers would use ‘sophisticated processes’ to target their best deals at consumers who they thought would be less likely to switch providers in the future.
Sheldon Mills, executive director, consumers and competition at the FCA, said: “Our interventions will make the insurance market fairer and make it work better. Insurers can no longer penalise consumers who stay with them.
“You can still shop around and negotiate a better deal, but you won’t have to switch just to avoid being charged a loyalty premium.
“We are keeping a close eye on how insurers respond to our new rules, to ensure that the benefits of a better insurance market are delivered to consumers.”
This move forms part of a package of reforms that come into effect in January, including rules that will make it easier for consumers to cancel the automatic renewal of their policy, as well as requiring insurance firms to demonstrate that their products deliver fair value to customers.