This follows the Government’s refusal to consider providing a temporary overdraft facility to a proposed not-for-profit special insurance fund for 200,000 high-risk households which will otherwise struggle to get affordable household insurance when the current arrangements come to an end next year.
The temporary overdraft facility would be used to pay claims if there were 2007-style floods in the early years of the scheme before it had built up its reserves.
Nick Starling, director of general insurance at the ABI, said: "The Government has indicated it will not provide any temporary overdraft facility for the insurance industry's not for profit scheme, which makes it very difficult for it to go ahead.
“As a result, negotiations have hit an impasse. Insurers know their customers are increasingly worried about flood cover and we will therefore continue talks with Government to try and find a way forward.
"The severe floods experienced by many areas of the UK this year are a reminder of the rising flood risk facing the UK. It is therefore vital that insurers and Government tackle this issue together - this is not just a problem for insurers. No country in the world has a free market for flood insurance with high levels of affordable cover without some form of Government involvement."
Contrary to some media reports, the insurance industry is not asking the Government for support funding of any kind.
An existing agreement, reached in 2008, obliges insurers to provide cover for high-risk properties while the government continues to improve flood defences.
Discussions have been taking place for months to try to make sure the arrangement continues after June 2013.
A Defra spokesman told the BBC they would be disappointed if the talks broke down "because our door is always open for further discussions".
He said: "We want to go further than the statement of principles to reach an agreement that ensures both the availability and the affordability of flood insurance for the first time.
"The insurance industry and the government continue to work together towards this goal.
"We are considering a number of options to ensure that home insurance continues to be widely available and affordable in areas of flood risk."
Meanwhile the Council of Mortgage Lenders (CML) said that a "workable" solution was needed, so households could obtain cover at a reasonable cost, otherwise it could affect mortgage offers.
It said: "If a solution is not forthcoming, then lenders will need to consider how best to approach this issue with their existing customers, and the extent to which it increases their lending risk on new loans.”
