Insurance giants could face a wave of costly compensation claims similar to PPI payouts after regulators found they were overcharging customers over £1billion a year.

The Financial Conduct Authority has ruled firms must not charge their existing clients more than new ones for car and home insurance.

Providers fear it could open the floodgates to PPI-style claims, which forced banks to hand back more than £50bn in compensation for mis-sold policies.

The Sunday Mirror found millions are overcharged by a total of up to £5bn a year because they accept renewal premiums rather than shop around for cheaper policies.

Car and home insurance are both potentially affected

Meanwhile the insurance firms offer their new clients better rates.

The FCA says new customers pay an average £285 for car insurance, while long-term customers pay £370. Initial rates for building insurance are £130, but they rise to £238.

Martyn James of consumer website Resolver said: “It’s possible some who have been overcharged might be able to claim it back, but proving it is  the problem.

“I suspect the industry will resist very strongly because they are paranoid about a mass claim.”