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Some estimates say that up to 200,000 pensioners - some of whom are unwell - could typically receive £2,000 each.
Prudential and Standard Life have agreed to review hundreds of thousands of policies, which go back to July 2008.
Standard Life has set aside £175m to cover the compensation programme.
Analysts have said that Prudential is likely to have to pay at least £200m.
It follows an investigation from the Financial Conduct Authority (FCA), which concluded that between 39 and 48% of those sold annuities by both companies were provided with "insufficient information".
Many of those people may have qualified for so-called enhanced annuities.
Enhanced annuities pay consumers a higher income, on the basis that they are in ill health and are likely to live for a shorter period than average.
Those who bought standard annuities instead would have lost up to £240 a year in pension income, according to FCA estimates.
In October 2016, the FCA estimated that 90,000 may have been sold the wrong annuities, but industry experts believe the final figure will now be higher.
Some of those sold the policies are likely to be in their 70s and not in good health.
Nevertheless, Prudential said it would take two years for them to go through all the cases. Standard Life said that most cases should be settled by the end of 2018.
"It is deeply disappointing that it has taken this long," said Tom McPhail, head of retirement at Hargreaves Lansdown.
The policies in question were "non-advised", meaning the customers took no independent advice and did not shop around for an alternative provider.
Earlier this week, the FCA said that 58% of those who buy an annuity - or income for life - did so from their existing provider.
"The way to avoid this situation arising in the future is for customers to shop around on the open market," said Mr McPhail.
"Worryingly, FCA data published only yesterday shows that over half of investors retiring today are still buying their retirement income arrangement from their existing pension provider, which begs the question as to whether the problem has actually been fixed."
Tens of thousands of pensioners who were sold the wrong type of annuity with two of the UK's biggest insurance companies are to receive compensation.