Living beside the water has always been an attractive, even a romantic, proposition, valued for the peace and quiet, the views, the wildlife and the sunsets. A promising location on a canal or river adds 15 to 20 per cent to the value of a property, but it often comes with a big disadvantage: the risk of flooding.

The deluge that struck large areas of the country last summer, forcing the insurance industry to pay out £3bn, is the type of event that climate experts - and insurers - are betting will become more frequent. And a report published by the Environment, Food and Rural Affairs select committee indicates that the UK is still not prepared for that sort of flooding because prevention measures have been focused almost solely on river and coastal defences, while plans to cope with heavy rainfall are still in an 'unclear and chaotic state'.

Not surprisingly, some insurers are now refusing to cover new customers, or charging steep premiums. And some owners are faced with excesses of tens of thousands of pounds on their policies.

So is buying a property next to a waterway a wise move? Developers certainly think so: the tranquillity of many of Britain's canals and rivers has been greatly disrupted of late, as brownfield sites are ploughed up to make way for new apartment blocks and warehouses and mills are converted into flats. It has yet to be seen whether the sagging housing market will dent this enthusiasm, but at the last count the country's waterside areas were awash with some £15bn of investment, according to British Waterways.

Phillip Ragg, from Shipston-on-Stour in south Warwickshire, is one of many homeowners whose riverside location, for so long an advantage, has become a liability. He tells a different story of waterside living.

Warwickshire was one of the counties hardest hit in last summer's floods, and Phillip's 18th-century Georgian home backs on to the river Stour. 'The garden has flooded a number of times, and we knew that before we bought the house. The insurers checked the postcode before we got our mortgage and said there was no problem. We weren't worried: water had never come anywhere near the house.'

But on 20 July last year, after two days of heavy rain, Phillip knew he was in trouble. 'The water was further up the garden than it had ever been, and on top of that there was the runoff from town. There has been a lot of development in Shipston-on-Stour; a lot of fields have been concreted over. There are three culverts in town, but all of them were blocked and the water authority, district authority and county council had all done nothing.'

The water peaked at two feet six inches inside the house and receded after 12 hours, causing £70,000 of damage. Philip says the insurers moved fast to process his claim and paid the full cost of repairs - despite for a time claiming that his proximity to the river meant he was not covered.

But as Phillip was to discover, his troubles were not over. 'The policy was due for renewal in December. The loss adjuster had warned us that we might not be reinsured, and she was right,' he says. Having stood on the banks of the Stour since 1770, his house now risked being blighted by its location, since flood insurance is essential to get a mortgage.

Phillip spent a long time researching the issue on the internet. He found a specialist broker who was prepared to cover the house, provided that flood defences were put up. Through discussions with his broker he found out what needed to be done, and set about making his home insurable again.

The house already had walls on either side, so Phillip had a one-metre-high, 10-metre-long frame built across the bottom of his garden. Panels can be dropped into the frame to make a watertight wall. He also attached watertight panels to the house's doors, and attached what he describes as 'periscopes' over the house's airbricks. In a flood, these open-topped tubes keep the water out of the airbricks and allow them to continue to 'breathe', meaning walls should dry out quicker.

The measures cost him around £15,000. And despite all his efforts, his premium has increased dramatically and his excess has gone up from £200 to £5,000. 'They are certainly getting their pound of flesh,' he says, 'but when the damage last time came to £70,000, a £5,000 excess doesn't sound so bad.'

Malcolm Tarling of the Association of British Insurers says that insurers have agreed to continue to insure homes in high-risk areas, defined as those with a greater than one-in-75 annual chance of flooding, provided the government spends more on flood defences.

This 'statement of principles' does not apply to new customers, he says. But he adds: 'Very few cases are being denied. More likely they will have to raise the premium and excess.'

Norwich Union dealt with 45,000 household claims as a result of last year's flooding, at a cost of £475m. Peter Ketteringham, household underwriting manager at Norwich Union, says some applications for cover from new customers are being declined: 'Under the statement of principles we have no obligation to insure a new customer or property that has a risk greater than a one-in-75 annual risk of flooding. If a customer has previously flooded we would want to know full details of the claim, and what action had been taken - for example, any proposed flood defences. Each case would then be considered individually, and there will be instances where we can't offer cover.'

Mary Dhonau of the British Flood Forum charity says those who live in high-risk areas can expect to see their excesses rising as high as £25,000. 'I don't think there should be new development near to rivers. It's clearly stupid. But new development has gone ahead and is still doing so with the Environment Agency's blessing.'

Phillip also accuses the authorities of not doing enough to plan for flooding. 'The big problem in Shipston-on-Stour is that the Environment Agency won't dredge the river. If they did that, it would cut the rate of flow and reduce the risk of flooding; they used to do it until about 25 years ago. But the Treasury say you have to have major events more than once before the economic model justifies spending.

'Two months ago we had another flood after heavy rain. I put the defences in place and they worked well. But I am under no illusions: we will be flooded again.'