Aviva threatens to walk away from talks on distribution of £5bn surplus

Aviva has set a spring deadline for reaching agreement with Clare Spottiswoode, the policyholder advocate, about distributing a surplus of about £5bn from its Norwich Union with-profits funds. If talks are not concluded by then, the insurer could walk away after nearly two years of discussions with Ms Spottiswoode.

Britain's biggest insurer says 1,000 customers a week are cashing in policies and missing out on potential payments averaging many hundreds of pounds if Aviva's proposed deal were put to policyholders.

Ms Spottiswoode, the former chief gas regulator, is a fierce defender of policyholders' interests. She is challenging the rules for the reattribution of inherited estates, which are fund assets that are not needed to meet obligations to customers.

Aviva is frustrated that after about 100 meetings with Ms Spottiswoode she is prepared to set the process back again. It also wants to settle the issue before moving many of the funds' 1.1 million policies to the reinsurer Swiss Re in October under a deal struck last year. Aviva wants to secure an agreement by the end of April with a view to making the payouts in late summer.

Ms Spottiswoode has accused the Financial Services Authority of "unfairly" favouringAviva's shareholders overpolicyholders by upholding rules that allow companies to use the funds to pay costs for attracting new business. She enlisted the help of the Treasury Select Committee to press her case, but the FSA's chiefs told the committee on Tuesday that the rules would stand.

Aviva is said to have put a proposal to Ms Spottiswoode that would see policyholders get over half the estate. The average payout to each policyholder is said to be "comfortably" over the £450 received when the French insurer Axa distributed most of its UK surplus. But it is not allowed to make an offer to policyholders without Ms Spottiswoode's support.

The insurer has told Ms Spottiswoode that a wholesale review of the reattribution process would put current negotiations at risk following an earlier review by the FSA in 2005.

"Aviva wants to get on with a conversation about what it can offer to customers, which is their choice, rather than debating rules from the FSA," a person close to the talks said.

Individual customers are free to reject any proposal from Aviva and could at some point get a "special distribution" payout that would be split 90:10 in favour of policyholders over shareholders.

Aviva's calculations show that it is in the interests of 80 per cent of the funds' policyholders to take the money now rather than sit it out. The insurer reckons another 15 per cent could hang on according to their appetite for risk, with 5 per cent likely to be better off if they stay.