Aviva, Britain’s largest insurer, is reconsidering the terms of a planned £1 billion payout to with-profits policyholders, in a move likely to disappoint up to a million loyal customers.

The Times understands that the owner of Norwich Union will tell the stock market next week that it remains committed to the deal, agreed in July, but that it will say that it will have to revisit the plan if stock market turbulence continues.

Faced with the most volatile share markets in living memory, Aviva is understood to be considering whether to trim or delay the payment. It is highly unlikely to scrap it entirely.

Aviva is understood to have consulted some leading shareholders on the reattribution aand they are thought to be comfortable with it.

The insurer agreed the terms of a reattribution of its inherited estate – the surplus capital that has built up over years in its with-profits fund – three months ago after tense negotiations with Clare Spottiswoode, the advocate for policyholder interests.

The insurer wants to retain some of the surplus capital and has offered policyholders a cash payment for forgoing future bonus payments. Aviva argues that it needs the capital to help to underwrite new business and to shore up the strength of the fund. The FTSE has fallen by almost 25 per cent since the agreement with Ms Spottiswoode was struck, putting heavy strain on Aviva’s financial strength. Its shares have fallen more than 60 per cent so far this year. Yesterday they closed down 27¾p, or 10 per cent, at 247¼p ahead of next week’s statement.

This month, Aviva was forced to deny that it needed to carry out a rights issue or raise fresh capital from existing shareholders.

Philip Scott, the finance director, has said that Aviva cannot rule out modifying its proposed payout.

Ms Spottiswoode’s office declined last night to be drawn on implications of a reduced payment or a delay. A spokesman said: “We are not going to speculate ahead of time. We are going to continue to work towards the deal that was agreed in July.”

Aviva said that the reattribution, and its terms, had always been subject to market conditions.

At the same time, when it updates the City on third-quarter trading next week, Aviva will say that it is happy with the capital cushion it holds to protect it against investments going sour. After putting in place increased hedges this summer, Aviva has a £1.9 billion buffer of regulatory capital and could withstand even a 40 per cent fall in the FSTSE100

Tony Silverman, an equity analyst in the research unit of Standard & Poor’s, the credit rating agency, said that he feared that Aviva’s regulatory capital “could become an issue if current investment conditions persist”. Mr Silverman noted that, as at June 30, Aviva held £25.6 billion of corporate bonds, which have come under intense pricing pressure amid predictions that more companies will default on their debt obligations in the coming months.

The Financial Services Authority, the City regulator, has been in close consultation with life assurers across the industry about the state of their capital reserves. The authority has been worried that insurers have not been taking sufficient account of increased default rates.

Shares in Prudential, Aviva’s main rival in Britain, rallied this week after it expressed firm confidence in its capital position.

Mr Silverman estimates that Aviva will report third-quarter new business sales of about £7.7 billion for its life division, equating to £25 billion over nine months.

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