More than a million Norwich Union policyholders have been promised a share in a one-off £2.1 billion windfall after the UK's largest insurer agreed to hand back almost half the surplus in its two main with-profits funds.

Individual payouts will vary depending on the size of investment and how long it has been in force, but all policyholders should see the value of their assets increase by about 10 per cent by 2010. A typical policyholder with £30,000 invested in a seven-year-old bond will collect £4,500.

Almost 50,000 holders of Norwich Union mortgage endowment policies with a shortfall will see them reassigned a “green light” at some point over the next three years. This will give a big boost to embattled homeowners who had previously been told that their endowment policies were unlikely to pay off their home loans in full once they reach maturity.

The landmark deal unveiled yesterday marks the end of a two-year wrangle within Britain's largest household insurer about the future of its £5.4 billion inherited estate. This consists of the surplus, or “orphan” assets that are accumulated over the lifetime of a with-profits funds.

Under guidance put in place by the Financial Services Authority, insurers can use surplus capital to subsidise new business and even pay mis-selling claims. However, campaigners have fought an increasingly successful battle to ensure that substantial sums of capital are returned to policyholders.

Mark Hodges, the chief executive of Norwich Union Life, said: “I think this is great news for policyholders.”

Under yesterday's deal, policyholders will receive 90 per cent of the £2.3 billion being distributed. The remaining 10percent, or £230 million, will go to shareholders. Tim Young, an analyst with Collins Stewart, said that, at £230 million, the payment to shareholders was “moderately positive”.

To qualify for the full payout, policyholders' investments must have been in force on January 1 this year and must remain so on the same date for each of the next two years.

Mr Hodges said that the insurer had tabled a separate offer of a cash payment to policyholders in exchange for renouncing their claims on the rest of the estate, worth about £3.1 billion. Aviva, the parent group of Norwich Union, claims it needs the £3.1 billion pot to underwrite future new business.

Mr Hodges said he was expecting a response from Clare Spottiswoode, the policyholder advocate responsible for securing the best deal for Norwich Union customers, by the end of the month. She has rejected two previous offers on behalf of policyholders. The £2.3 billion payout will be paid out regardless of whether Ms Spottiswoode accepts the current deal.

Norwich Union is the first of the UK insurers to press ahead with a distribution to policyholders of its inherited estate and the terms are likely to set a precedent for rivals such as Prudential and Standard Life. The UK insurers are estimated to hold surplus assets of about £16 billion in total.

Ms Spottiswoode welcomed the special bonus, but said it was unfair to stage payments over the next three years. She said: “The money is available now, so how on earth can it be fair to deny it to policyholders now?”

She called on Norwich Union to backdate payouts to cover customers who have cashed out of policies since November, when the insurer first said it would press ahead with a distribution. She added: “Former policyholders who are eligible for the incentive payment alone will think it unfair that they lose out on part of this money. I agree with them.”

Ms Spottiswoode said the insurer had put “little new money on the table” with its offer on the rest of the estate.

Mr Hodges said: “On balance, we think this is the best and fairest deal for policyholders.” He said that, under the terms of the policies, payments could not be backdated.

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax