Aviva, the UK’s biggest insurer, could announce as early as Wednesday a deal to free up about £5bn of surplus in its life funds, delivering windfalls to more than 1m policyholders.

Aviva, which reports interim results on Wednesday, has been negotiating with Clare Spottiswoode, policyholder advocate, on a deal to carve up the surplus between shareholders and policyholders, for more than two years.

Although the insurer refused to comment on Tuesday night, insiders say a deal has been reached, although there is still the possibility the agreement could be derailed by last-minute details.

Under the expected deal, the majority of the surplus, in two life funds, will be allocated to policyholders.

However, this would include a £2.1bn special bonus already pledged. The expected agreement would also be approved by the Financial Services Authority.

Under the restructuring, Aviva will pay policyholders for giving up their rights to future payouts from the surplus, known as the inherited estate.

The money would belong to Aviva shareholders, but will remain within the life fund for at least six years, to continue to protect it.

The deal is good news for Andrew Moss, chief executive of Aviva, who has been under pressure over a poor share price performance, senior departures and a £750m loan by Aviva’s commercial finance arm to property and financial services group Dawnay Day.

It should help boost the share price and bolster Aviva’s financial strength, amid increasing concern about the impact of turmoil in global financial markets on insurers’ balance sheets.

But it could prove controversial, particularly if Ms Spottiswoode recommends the deal to some policyholders, but not to others.

Aviva’s outcome is also in stark contrast to a decision last month by Prudential, its arch rival, to abandon plans to free up its £8.7bn surplus.

A conclusion to Aviva’s negotiations had been expected before the Pru’s decision.

However, the talks between the insurer and Ms Spottiswoode were complicated by falling equity markets, which affect the amount of surplus available.

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