Royal London, the UK's biggest mutual insurer and owner of Scottish Life, is in talks with the fourth-biggest mutual Royal Liver Assurance over a possible merger.

It would create a group with almost five million members and around £35bn of funds under management, but the main attraction would be pooling the insurers' substantial books of inactive policies formerly sold door-to-door by sales forces.

"Discussions are at a very early stage and there can be no certainty that they will progress," Royal London said. "In any event, it is likely to take time to consider fully the merits of any combination and no further announcement can be expected until such consideration has been undertaken."

The news is likely to raise the alarm in Liverpool, where the insurer was founded in 1850 and where it still part occupies the landmark Royal Liver Building (1911). It recently pledged £20,000 for cultural events in the city next year. A spokesman said it was also "too early to say" whether the Royal Liver name would disappear after 157 years.

If the merger merely pools the long-term insurance funds, Royal Liver's 1.7 million members are unlikely to gain windfall pay-outs as there would be no cash changing hands.

Royal London bought listed rival United Assurance for £1.6bn in 2000, in a deal focused on combining the funds. Then in 2001 it paid £1.1bn for mutual Scottish Life, which it has grown along with asset management as its door-to-door business has declined.

Last year, Royal London lifted profits by a third to £431m and said it was hanging on to its 5% share of the pensions market despite fierce competition.

Royal Liver last week reported a trading surplus up from £99m to £144m, and chief executive Steve Burnett admitted that when radical restructuring had begun in 2004 "the society's future was not certain ... radical action was needed to reshape and modernise the society to compete in today's market place".

He said solid foundations had now been built but added that "in the face of challenging market conditions, there is much more to do".

Alasdair Buchanan at Royal London said: "We have two organisations down similar paths in terms of strategy, though Royal London probably started a bit earlier on reinventing itself and as a result are further down that path."

Buchanan said Royal London was confident of Scottish Life's position in the pensions market, where along with Standard Life it has championed a more "sustainable" business model which does not rely on overpaying commission.

"Others are following suit, and we are entirely comfortable with that model ... There is no reason why Royal Liver couldn't be part of a growing and successful group."