Lloyd's of London regulators have found that £3 billion of the market's premiums is in the hands of insurers with either inadequate management or an over-exposure to their risks.
Nineteen syndicates and five managing agents face a deadline at the end of this month to increase their capital base or have their underwriting capacity cut.
Some managing agents could have to increase their capital base by as much as 20%.
Regulators are imposing higher standards in a bid to rid the 300-year-old market of its archaic and informal practices.
But the move will also pre-empt the introduction of stricter requirements for insurers looking to join the mutual insurance market.
"We put the powers in place to tighten up the market last year," said David Gittings, director of Lloyd's regulators. "Now we are putting these powers into effect.
"As a result, almost a third of the market's £10bn capacity is currently subject to regulatory strictures."
Nineteen syndicates have to increase their capital base by between five per cent and 15% because of the high level of risk of their portfolios.
This is partly because of the level of their exposures and partly because of the level of their reinsurance. Five managing agents, controlling about £700m of capacity, have to increase their capital base by ten per cent because their management is inadequate. Regulators graded them level two out of a possible four. The bottom grade of one would require them to quit the market altogether. It is likely that some managing agents have more than one capital loading because they also control a syndicate which has a risky profile.
In addition, another 13 management agents have been told to beef up their management resources.
Five are allowed to continue with their present management structure but only if they do not expand their business.
But eight have been given six months to improve management controls.
There has been a strong lobby to tighten Lloyd's entrance rules following the reconstructiuon and renewal programme which took place in the wake of disastrous losses in the early 90s.
"The rules governing entrance into Lloyd's are far too lax," said Robert Hiscox, chairman of Lloyd's Market Association.
"As a mutual, Lloyd's must protect its members if it wishes to keep its brand name and worldwide licences."
In the past three years, regulators have adopted a tough line on the market practitioners.
Gittings says 71 individuals have been stopped from working at Lloyds, either through expulsion or by firm persuasion to quit.
There are currently 40 Lloyd's brokers on the regulators' watch list.
Currently, Lloyd's requires a minimum of 50% capital from corporate members and 45% from individual Names of a syndicate's risk-based capital.
