The underwriter for a major Australian insurer will pay back almost $11 million to customers, after it was found collecting a levy that had been ended.

Investigations have found Insurance Manufacturer of Australia, the underwriter to major Victorian insurer RACV, did not stop charging a fire services levy that used to come from insurance premiums, but was shifted to now come from council rates.

Not only did the underwriter not pass on the saving, they used the ill-gotten funds to mask an increase in home building premiums.

Victorian Fire Services Levy Monitor Professor Alan Fels said the boost in base home building premiums was more than coincidentally timed.

“They should have reduced their prices 20 or 30 per cent, they should have reduced them by 15 per cent,” Prof Fels said.

“Instead they increased them.”

“We don't believe that the price increases that occurred without them being able to take advantage of the fall in tax.”

Insurance Manufacturers of Australia said in a statement that it believed it was following legislation.

It will now reimburse around 200,000 affected policy holders, who will each receive refund of about $50 each.