Direct Line is set to pay out £30 million in compensation to customers who were overcharged when they renewed their car or home insurance.

The insurer admitted to an “error” in implementing the financial watchdog’s new pricing rules which came into effect from the start of 2022.

It meant that existing insurance customers were charged more for their renewal than they would have been if they were a new customer with Direct Line, the Financial Conduct Authority (FCA) said.

The FCA brought in new rules last year which prevent renewing home and motor insurance customers from being quoted prices which are higher than a new customer would be quoted through the same channel.

FCA sign
The FCA brought in new pricing rules last year aimed at making the insurance market fairer for customers (Alamy/PA)

“An error in our implementation of these rules has meant that our calculation of the equivalent new business price for some customers failed to comply with the regulation,” Direct Line said.

“As a result, those customers have paid a renewal price higher than they should have.”

The insurance giant has kickstarted a review into its past policies.

Direct Line did not specify how many people are expected to be compensated but it estimated that the total payments to affected policyholders will be in the region of £30 million.

Not all customers who have renewed their policy since the FCA’s pricing rules came into effect will have been overcharged, the PA news agency understands.

Direct Line said it will be contacting affected customers directly, and customers do not need to do anything themselves at this stage.

The insurance giant ramped up prices across its motor and home policies over this year as the cost of claims soared.

The average motor renewal premium jumped by nearly a fifth – 19% – year-on-year over the start of 2023.

On Wednesday, the group said it had appointed Adam Winslow from rival Aviva as its new chief executive, and he will take the reins in the first quarter of 2024.

Sam Richardson, the 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.”