The region suffered some of the most prolonged and devastating flooding in generations late last year, particularly on the Somerset Levels and across large parts of Devon and Cornwall.
And homeowners, farmers and businesses face the very real long-term prospect of being unable to secure insurance if a deal is not done by June 30.
The Association of British Insurers (ABI) and the Government have been in talks for months over a new strategy.
Environment Secretary Owen Paterson last night admitted he is "disappointed" at failing to secure a new agreement.
Mr Paterson said he accepted "time is running out" with the deadline approaching, but raised the possibility the current deal could be extended in the short term while negotiations continue and a new deal is enshrined in legislation.
Floods Minister Richard Benyon, meanwhile, said the negotiations had been "arduous and difficult" but insisted it was a complicated issue and a breakthrough will come – albeit "not at any price".
"We want to get a solution that works for the long term," he said.
The insurance industry has been alarmed that the Government has made cuts to flood defence spending to help tackle the deficit.
To ease their fears, insurers want the Government to provide a temporary overdraft facility, to be paid back in full, to underwrite claims for 200,000 high-risk households in the event of serious flooding, such as those seen in 2007.
If the "statement of principles" expires, households at risk of flooding – many more than just the 200,000 high-risk properties – would be at the mercy of the free market, with many facing premiums that are prohibitively high or even not being able to get any coverage at all.
During a House of Commons debate, former Somerset farmer Neil Parish, who represents the Devon constituency of Tiverton and Honiton for the Conservative Party, said: "I am very keen that the Government actually negotiates a very genuine system that allows people to have affordable insurance in high-risk areas, because otherwise what we will end up doing is we will end up putting a levy across all insurance-payers, only to find that people can't get a genuinely affordable amount of insurance."
Stephen Gilbert, Liberal Democrat MP for St Austell and Newquay, warned that the "clock is ticking" and that thousands of people and businesses in Cornwall may soon no longer be able to access flood insurance.
He added: "Flooding can be devastating, even when there is no loss of life. It can have a devastating impact on businesses and individuals as possessions and memories are washed away.
"In the clear-up, people need to know that insurance companies will pay out in a timely way and that they will be able to get insurance again for the future.
"Sadly, there remains a considerable danger that this simple aspiration for business and home owners will not be guaranteed and that affordable flood insurance will become unavailable in our country."
Conservative MP for South East Cornwall, Sheryll Murray, said one of her constituents was charged £200 to £300 for her flood insurance last year but was told it would now cost £530 to renew her policy after her home was flooded.
Mrs Murray said: "The huge increase in her costs caused her to look elsewhere, but the majority of companies refuse to take her on at the moment."
