More than 2.4 million Norwich Union with-profits policyholders will miss out on cash payouts averaging £2,000 after the insurer moved to cut its final bonus rates in the wake of tumbling markets.

Norwich Union, owned by Aviva, said that it would be cutting its terminal bonuses by as much as 10 per cent because equity markets, commercial property and corporate bond yields have slumped since the start of the year. The cuts will apply across all four of Norwich Union's with-profits funds, the two largest of which are NULAP and CGNU. They have a combined twomillion policies.

The changes, which came into effect on Monday, come after the CGNU fund lost 7.3 per cent for the six months to June 30.

Norwich Union, which said that it was introducing the measures to protect the strength of the fund, said that payouts for its more conventional policyholders would be cut by an average of 5 per cent.

John Lister, Norwich Union's chief actuary, said that the effects on final payouts would vary, but he said that the average customer would probably find themselves down about £2,000.

He emphasised that the cuts were designed to protect the long-term interests of policyholders and ensure that the fund remained healthy. Over the long term, returns had been very strong, he said.

As a result of yesterday's changes, a Norwich Union policyholder who paid £50 a month into a mortgage endowment policy for 25 years will collect a final payout of £42,885. This compares with £46,829 if their policy had matured last January.

Like its peers, Norwich Union operates a “smoothing” policy, where less is paid out to policyholders in the good investment years to ensure that more can be paid out during the bad years. Mr Lister said that market conditions had meant that Norwich Union's final bonus policy, which is reviewed every six months, was no longer sustainable. “We need to ensure that those policyholders who leave the fund do not take more than their fair share at the expense of those customers who remain in the fund,” he said.

Yesterday's decision underscores the dire state of the investment markets, but will still disappoint thousands of Norwich Union customers whose policies will mature this year. The move stands in stark contrast to July, when it offered more than onemillion with-profits holders an average £1,000 cash payout as it agreed to hand back £1 billion of its £2.1 billion “inherited estate” or surplus with-profits assets.

Norwich Union has already rewarded policyholders with a £2.3 billion special bonus from the inherited estate, which, controversially, it is paying out over three years.

Britain's biggest household insurer follows Friends Provident, its smaller rival, in cutting its terminal bonus rates. These tend to be calculated by most insurers as a percentage of the total bonuses that have been paid during the lifetime of a policy.

Friends hit hundreds of thousands of its with-profits policyholders in July after it slashed final payouts on its £13 billion fund by more than 50 per cent in some cases.

The insurer fund had lost a similar amount - 7.25 per cent - during the first half of the year because of market volatility.

Friends expects to save about £30 million as a result of its bonus cuts. Mr Lister insisted that Norwich Union's bonus cuts would generate no savings for the insurer.

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