One million homeowners with mortgage payment protection insurance (MPPI) will receive refunds totalling £60 million after the City regulator raised concerns over unfair premium increases and reductions in benefits.

MPPI covers mortgage repayments if the borrower becomes unable to pay because of accident, sickness or unemployment. As unemployment levels have risen sharply this year, policyholders have endured a series of premium increases of between 20 per cent and 100 per cent.

The Financial Services Authority (FSA) raised concerns about MPPI in March and said last night that it had reached agreement with providers to refund increases in premiums and reverse reductions in cover made this year. A deadline of June 30, 2010, has been set for the payment of refunds, which will average £60 and be paid to former as well as existing customers.

The FSA estimates that about 2.1 million borrowers have an MPPI policy, which is usually sold alongside a mortgage. About half of those policyholders will qualify for a refund.

Banks and insurers that sell the insurance will have to offer to reinstate policies if a customer cancelled within two months of an increase in premium or change in cover made this year. The terms must be those that existed before the premiums or benefits were changed. They have also been ordered to freeze premiums and cover for customers for the rest of the year.

MPPI is underwritten and sold by large insurers, which also offer the cover on the high street through banks and building societies or through standalone providers. The protection kicks in from day one, or after 30, 60 or 90 days, and usually lasts for 12 months.

The Post Office came in for particular criticism this year after it reduced dramatically the scope of its Lifestyle Protection product while increasing the monthly premiums. It cut the maximum monthly benefit from £2,500 to £1,500 and extended the waiting period from 30 to 90 days.