Continuing floods in the UK mean insurers may face the biggest payouts since 2007 and homeowners may be at risk of insufficient cover.

Analysts say the situation is all the more critical because from next year insurers will no longer be obliged to offer flood cover.

This is because the agreement between the UK Government and the insurance industry – the Statement of Principles – expires on June 30 next year and a replacement scheme has not yet been agreed on.

Under the current scheme, insurance companies are “obliged to offer flood cover as part of standard policies in most cases”.

Flash floods in 2007 led to £3 billion ($4.6 billion) being paid out in claims. The Association of British Insurers (ABI) is warning that current weather conditions could cost the industry hundreds of millions of pounds more.

Also, with the Statement of Principles due to expire next year, homeowners might struggle to purchase cover and may have to do more personally to protect their properties from flood damage.

The ABI has been critical of the current agreement with the Government, describing it as a temporary measure put in place in exchange for the Government investing more in flood mitigation.

Earlier this year the ABI published a research paper based on a sample of 124,000 insured properties at significant risk of flood and found 78% pay less than they would if flood risk were properly reflected in the price.

“The degree of underpricing is significant,” the paper says. “On average, home insurance for those at significant risk of flood is underpriced by 165%.”

The paper also points out the Statement of Principles “constrains normal market behaviour” because it restricts insurers’ ability to charge risk-based premiums, often offering flood cover to properties at high risk, at prices below a level that reflects the risk.

However, ABI Director of General Insurance Nick Starling says a replacement scheme is being discussed with the Government.

“Insurers have been committed for a long time now to trying to find a new replacement solution for the current Statement of Principles agreement that is better for customers and secures the availability and affordability of flood insurance,” he said.

“We have done a lot of work on this issue and are at an advanced stage in our discussions.”