Public payouts for compensating businesses and residents whose property was destroyed in the 2011 riots could soar to £100 million or more, a report has warned.
A review of the Riot Damages Act, which dates from 1886 and has been applied sparingly since then, revealed the public expenditure cost on claims under the Victorian legislation is £35.2 million and rising.
Elsewhere, the report reveals the insurance industry has paid out more than £167 million so far on 2,254 claims, including £1.5 million to domestic policyholders.
In August 2011, the police shooting of Mark Duggan in Tottenham, north London, sparked a tidal wave of rioting, arson and looting that spread across parts of the UK.
The review of the Act, conducted by former civil servant Neil Kinghan, concludes it should be replaced with a new version.
Mr Kinghan said: "The Riot Damages Act is an important piece of legislation protecting the public and businesses in the event of a large-scale riot but, at over 100 years old, it is well overdue for reform.
"During my review I met a wide range of people affected by the riots and it was clear that, while central and local government did their best, they were hampered by a lack of preparedness both for the riots themselves and for the demands for compensation they generated."
Some of the cash paid out by private insurers is included in the cost to taxpayers because the Act allows insurers to be compensated for riot claims.
While Mr Kinghan recommended that the law continues to allow insurers to be reimbursed, he said the amount of compensation that can be provided to insurers should be capped.
A cap on compensation to insurers for riot damage should be set to businesses with a turnover of £2 million, he said.
ABI director-general Otto Thoresen said insurers have now paid out more than £200 million to customers for riot damage claims.
He said: "The recommendation that insurers should continue to be able to recover from the state certain riot payments made to customers is vital if riot cover is to be affordable and available."
He added: "However, we are concerned that the review recommends that insurer recoveries from the state should be restricted to businesses that turn over less than £2 million a year. This could be a disincentive for some larger firms to locate in some areas."
Mr Kinghan's report also recommends that the claims process is speeded up so smaller businesses hit by riots are given the help they need to get back on their feet again.
He also recommends setting up a "riot claims bureau" in the event of further widespread riots, which would be staffed by loss adjusters and insurance experts.
Policing, Criminal Justice and Victims Minister Damian Green said: "This is a very thoughtful and constructive report and we aim to launch a public consultation by the end of the year."