The Financial Conduct Authority (FCA) said it is cracking down on unscrupulous firms to end the practice where existing customers are offered quotes that are higher than new ones.
Regulators found last year that millions of customers were being unfairly charged higher prices, including an extra £1.2 billion in 2018 alone.
Insurers will be required to offer renewing customers a price that is no higher than they would pay as a new customer.
But those who regularly shop around for a cheaper deal, who are often younger customers, could end up paying more, with discounts becoming smaller and more scarce.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “Regular switchers will pay the price. It’s something we’ve seen regularly from the FCA now, where efforts to protect the most vulnerable customers end up costing savvier consumers more.”
Ian Hughes, chief executive at data consultancy Consumer Intelligence, said: “The savviest consumers who shop around each year will see prices rise and discounts and offers disappear.
“However, there is an opportunity for the industry to take advantage of all this change that is coming and do something that will be good for brands, good for the industry and good for consumers.”
The FCA admitted the changes are likely to bring an end to unsustainably low-priced deals to some customers.
But officials said that overall, consumers will save £4.2 billion over 10 years.
Many firms increase prices for existing customers each year at renewal in a practice known as price walking.
The FCA said: “This means that consumers have to shop around and switch every year to avoid paying higher prices for being loyal.
“It also distorts the way the market works for everyone. Many firms offer below-cost prices to attract new customers.
“They also use sophisticated processes to target the best deals at customers who they think will not switch in the future and will therefore pay more.”
The watchdog added that the new rules will also make it easier for customers to cancel automatic renewal of their policy and require insurance firms to do more to consider how they offer fair value to their customers.
Insurers will also have to send data to the FCA so the regulator can monitor the market more effectively.
Sheldon Mills, executive director of consumers and competition at the FCA, said: “These measures will put an end to the very high prices paid by many loyal customers.
“Consumers can still benefit from shopping around or negotiating with their current provider, but won’t be charged more at renewal just for being an existing customer.
“We are making the insurance market work better for millions of people. We will be watching closely to see how the market develops in the future and to ensure firms continue to deliver fairer value to consumers.”
The new rules will come into effect from January 1 next year and the impact will be reviewed in a full evaluation in 2024.
Charlotte Clark, director of regulation at the Association of British Insurers (ABI), said: “While the FCA recognises their interventions could lead to price increases for consumers who regularly shop around, these remedies should ensure that all customers get fair outcomes from competitive insurance markets.
“It is vital that the new rules are applied across the whole insurance market, including price comparison websites and insurance brokers, with a uniform level of supervision and monitoring by the FCA, to ensure good customer outcomes.
“As the FCA has said previously, insurers do not make excessive profits and, as they now point out, it is likely that firms will no longer be able to offer unsustainably low-priced deals to some customers.”
Rodney Bonnard, UK head of insurance at EY, said: “In practice, we expect this to be beneficial for longer term customers but customers who switch providers regularly may pay more once the reform is implemented.
“In the immediate aftermath of the transition, we could well see some product consolidation, however over time, innovation will be crucial to competitive advantage.”
Gareth Shaw, head of money at Which?, said: “For far too long, insurance companies have employed sharp pricing tactics to lure in customers before hitting them with eye-watering price hikes and exorbitant premiums, so it is right that measures will finally be introduced to help put an end to these unfair practices.”
– How big are loyalty penalties?
The regulator previously found new customers pay around £285 for motor insurance while customers who have been with their provider for more than five years pay £370.
New customers for combined buildings and contents insurance pay £165 while customers who have been with their provider for more than five years pay £287.
And new customers for contents-only insurance pay £56 while customers who have been with their provider for more than five years pay £138.
– Is a customer’s age a factor?
Yes. Motor insurance customers aged under 45 remain loyal for less than two years on average. Customers aged 65-plus typically stay loyal for more than four years.
The trend is similar for home insurance, the FCA said.
– Will there be no point shopping around?
It is still worth looking for better deals elsewhere – and the new rules do not stop you negotiating with your current provider either.
Differences in firms’ products and service quality will remain a good reason to switch.