Norwich Union, the insurance group owned by Aviva, is within weeks of concluding knife-edge talks over the future of £2.6 billion of surplus capital in its with-profits fund which could either result in a cash windfall for than one million customers or leave policyholders with nothing.

Mark Hodges, the head of Norwich Union's UK life business, told MPs yesterday that he remained confident that he could strike a deal with Clare Spottiswoode, the policyholder advocate, over the potential reattribution of the insurer's £2.6 billion inherited estate, which contains extra capital that builds up over generations.

A policyholder advocate is an independent figure who represents policyholders' interests to the company.

However, Mr Hodges refused to rule out the possibility that talks could end without agreement, with Norwich Union abandoning a payout altogether.

"I remain confident we can do a deal, but we have to accept that it remains uncertain," said Mr Hodges, speaking before a review by the Treasury Select Committee into insurers' inherited estates.

Norwich Union has made a third, and most likely final, offer to Ms Spottiswoode over a proposed reattribution — which would involve a one-off cash payout to policyholders in exchange for them waiving the right to future distributions from the fund.

The insurer argues that it needs to retain this capital to underwrite new business opportunities and the investment process.

Norwich Union has already agreed to pay out a staged distribution worth £2.4 billion to policyholders, having concluded that this amount was surplus to its requirements to back growth in the fund.

Mr Hodges admitted that there "are significant gaps between Norwich Union and the policyholder advocate" and refused to rule out the insurer abandoning a payout altogether if a deal with Ms Spottiswoode could not be reached.

However, he said: "We expect to close negotiations in weeks not months."

A spokesman for Ms Spottiswoode noted that closing negotiations did not necessarily mean striking a deal over a payout. Ms Spottiswoode has already rejected two proposals by Norwich Union on the grounds that policyholders would come off at the raw end.

Convention is for 90 per cent of the surplus to be offered to policyholders, with the remainder going to shareholders. It is thought that, having made the distribution, the insurer is being considerably more aggressive with its offer.

Prudential, the UK's second-largest insurer, is also considering a reattribution of its £8.7 billion inherited estate and Nick Prettejohn, its UK chief executive, was also speaking yesterday before the Select Committee.

Mr Prettejohn ruled out any one-off distribution to Prudential's four million eligible customers this year on the grounds that the insurer had no concluded it needed all of surplus capital currently in its fund to back new business.

It also emerged during the course of yesterday's hearing that Prudential has paid out £1.6 billion from its fund in recent year in compensation against mis-selling claims.

Questions were further raised about the use of some of the fund's assets to help top up a deficit in the staff pension fund.

Mr Prettejohn denied that policyholders would have lost out. He said investment and bonus decisions involving the fund were unaffected by the compensation payments.

Some £1.1 billion of the figure represented actual payouts, with £500 million incurred in administration costs.

Mr Prettejohn said Prudential had yet to decide whether to embark on a reattribution of its surplus funds. It has already nominated a policyholder advocate, Peter Bloxham.

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