Britain's insurers fear the government could force them to cover homes in flood zones at a loss after talks over a planned state-subsidised protection scheme broke down.
The government is refusing to provide a financial backstop for a planned fund, financed by a levy on all households, which would be used to subsidise insurance for at-risk homes, the Association of British Insurers said on Monday.
The fund had been intended to replace an agreement, due to expire in July 2013, which commits insurers to providing affordable cover for 200,000 flood-prone homes in return for a government pledge to upgrade flood defences.
Some in the industry now worry the government could force it by law to continue offering below-cost cover without taxpayer support, leaving them exposed to big potential losses, if no compromise is reached before the current deal expires.
"The government would like to work something out with the industry, but it's not going to leave households without flood insurance, and it has the stick of legislation," one industry source said.
The stand-off comes amid severe floods across England and Wales that have claimed four lives, according to media reports.
Property damage could cost insurers 1 billion pounds, their biggest flood claims bill in five years, accountants PricewaterhouseCoopers estimate.
"I think the government could legislate, that's clearly an option open to them," said Mohammad Khan, an insurance partner at accountants PricewaterhouseCoopers.
Forcing insurers to provide protection to at-risk homes at a price that does not cover projected claims would expose them to losses whenever floods occur. The industry could try to offset these by raising premiums for other customers.
Britain has been hit by severe floods over the past ten years, with one in 2007 costing insurers 3 billion pounds.
"We're in negotiations (with insurers) at the moment. We need to take a tough approach, frankly," British Prime Minister David Cameron told Sky News on Tuesday.
"It's important that insurance companies do what they're meant to which is to provide insurance to households, and we're going to make sure that happens."
ABI flood experts are due to update the industry on their negotiations with the government on Thursday, two sources said. The ABI could not immediately be reached for comment.
Bjorn Norrmann, an analyst at the Fitch ratings agency, said the government would probably agree to backstop flood insurance in the end because of political obstacles to coercing the industry.
"We believe in the end there will be some form of government-subsidized, non-profit risk pool," he said.
"The alternative is for insurance companies to underwrite at a loss which could prove controversial because you'd be forcing them not to make a profit on some policies."
Nearly 150 flood warnings, indicating that flooding is expected, were in force across England and Wales as of 1400 GMT on Wednesday, although the risk of major incidents had receded, Britain's Environment Agency said.
Britain is the only country in which the government does not accept some liability for flood damage, the ABI says, although this is disputed by the government.
Britain's biggest home insurers include Aviva, RSA and Direct Line.
Reuters reported last week that a government refusal to provide a financial backstop had cast doubt over the flood insurance subsidy plan.
(Reporting by Myles Neligan; Editing by Helen Massy-Beresford)