Some 6.8 million life insurance customers details could have been put at risk by Norwich Union, according to the Financial Services Authority (FSA).
The regulator notes that the financial services providers life insurance business - one of the biggest in the UK - put in place procedures leaving it open to attack.
This resulted in both actual and attempted fraud being committed against customers, the FSA reveals.
Director of enforcement Margaret Cole comments: "It is vital that firms have robust systems and controls in place to make sure that customers details do not fall into the wrong hands.
"Firms must also frequently review their controls to tackle the growing threat of identity theft."
Norwich Union has now been fined a total of £1.26 million by the FSA - around half the total sum of life insurance policies which could have been affected had the fraud gone unnoticed.
Some £3.3 million of insurance policies were requested by fraudsters to be surrendered in 2006, while the security breach extended to allow the details of some accounts to be modified.
The fine originally stood at £1.8 million but, under FSA rules, a 30 per cent discount is applied should the accused party agree to pay during the early stages of the investigation.
"This fine is a clear message that the FSA takes information security seriously and requires that firms do so too," Ms Cole concludes.
Figures from Norwich Union show that 74 policies in all were fraudulently surrendered and 558 others put at risk.
Chief executive Mark Hodges apologises for the breach - but stresses that under the financiers terms and conditions, any fraudulent losses are reimbursed in full and that only a very small proportion of customers were actually affected.
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