Tumbling stock markets could force Norwich Union, the UK’s largest insurer, to scale down its planned £1 billion payout to with profits policyholders next year, experts said today.

Norwich Union, which is part of Aviva, said this summer that it would be paying an average of £1,000 each to one million policyholders as part of a reattribution of surplus assets in its with profits funds.

But since its announcement at the end of July the UK stock market has fallen by 24 per cent, prompting some financial experts to question whether there will be sufficient surplus assets in the kitty to carry out the reattribution as planned.

Andy Cowan, head of private client business at Towry Law, the independent financial adviser, said: “The Norwich Union with profits funds are about 50 per cent invested in shares, so they will have been hit hard by the recent stock market falls. This will definitely have put the proposed reattribution deal in jeopardy, particularly since commercial property, another element of the with profits funds, has also performed badly in the past few months.”

David Ross, a spokesman for Norwich Union, said: “We are looking to pay back £1 billion to people but not until 2009 and there is some way to go. The surplus assets have a value and that value will have declined since July, but the key question is not how much they are worth now but how much they will be worth next year.”

Reattribution is the term given to a deal where shareholders buy out policyholders’ claims to any share of the remaining surplus assets - known as the inherited estate - in a with profits fund. Before any reattribution goes ahead it has to be voted on by policyholders - something that has yet to happen in Norwich Union’s case.

The Norwich Union deal was thrashed out over 18 months of negotiations between the insurer and Clare Spottiswoode, the independent policyholder advocate. A spokesman for Ms Spottiswoode said: “We are continuing to work on the basis of the deal that was announced in July. We have not been notified of any changes to it by Norwich Union and it’s a matter for them to decide if things continue as they are.”

Dominic Lindley, a principal policy adviser at Which?, the consumer organisation, said that Norwich Union’s decision today to re-introduce market value reductions, or exit penalties, of as much as 22 per cent on some with profits funds could hit policyholders who were only staying with Norwich Union in order to benefit from the expected reattribution payout and other special bonuses.

Norwich has an estimated total of £5.4 billion of surplus funds. In addition to the proposed £1 billion payout from this surplus next year it has already agreed to share out a further £2.3 billion between policyholders and shareholders, with policyholders receiving £2.1 billion in the form of special bonuses, payable in this and the following two years. Norwich Union has said these bonuses will not be affected by the turmoil in the stock market.

Times Recommends

• How to sell your home in a downturn
• How to boost your spending power
• Unemployment benefits explained