The insurance giant will carry out a review to identify all car and home insurance customers who may have been overcharged since January 2022 due to an error in implementing new rules.

At the start of last year, the Financial Conduct Authority (FCA) brought in new insurance rules to tackle the ‘loyalty penalty’. These stated that existing customers could not be charged more for renewals than if they were a new policy holder.

The overcharging issue affects customers of Direct Line, Churchill and Privilege but at this stage, the group couldn’t confirm how many policy holders are impacted.

As such, it is carrying out the voluntary review – the first of its kind relating to these specific insurance rules – and said customers do not need to do anything as it will contact them directly.

A Direct Line spokesperson confirmed the estimated £30m redress includes the statutory 8% interest for refunds, with half the sum provided for within the group’s 2022 full year results.

They said: “We have always sought to operate within the FCA’s pricing rules.

“What has become clear from our engagement with the regulator is that there are a group of customers who may have been incorrectly charged. Work is already ongoing to confirm these customers, so we can apologise and refund any money owing to them as quickly as possible.”

Customers being hit by extra costs is ‘shocking’

Direct Line added that the majority of customers who have seen an increase in their premiums will have been unaffected by this issue.

They said: “Insurance prices have been going up over the last two years due to a number of factors affecting the entire insurance market – including high claims inflation, the overall economy, claims frequency and severity, and unforeseen weather events.”

However, Sam Richardson, deputy editor of Which? Money, said: “At a time when car and to a lesser extent home insurance premiums are rocketing, with insurers blaming rising claims costs, it’s shocking that customers are being hit by extra, unnecessary costs, just for being loyal to their insurer. This practice has been banned since the start of 2022.

“The regulator should act quickly to identify and punish insurers charging existing customers more than if they were new.”

This isn’t the first time the insurer has been under the spotlight by the city watchdog. In July it was ordered by the FCA to look back on five years of car insurance claims after admitting underpaying some customers.