Drake Insurance was forced to cease trading by the Financial Services Authority this week after failing to maintain the required margin of assets over its liabilities.
The move is believed to result from a major American capital provider refusing to offer additional backing.
Drake sells private motor cover through around 2,000 brokers and intermediaries nationwide, and about 200,000 policyholders will be affected by the news.
Last year the company had gross written premiums of £50.5m.
Drake chief executive David Prewer blamed the soft UK motor insurance market conditions, claiming that 'rigorous pricing action' had failed to save the company.
Prewer said: "The directors of Drake regret to announce that the company has been served notice by the FSA that the company is to cease underwriting new and renewal business with immediate effect."
A statement from the FSA read: "Drake Insurance has failed to maintain the required margin of assets over its liabilities and has failed to produce an adequate plan to remedy the situation."
The FSA has therefore required Drake to immediately take steps to ensure that it accepts no new business, either directly or via intermediaries, after Wednesday 10th May."
The future of the company's staff is also unclear. It has 168 employees at its offices in Brighton.
One company that has been massively affected by the withdrawal is Endsleigh Insurance. The intermediary had a £16m scheme with Drake which it claims to have placed with another insurer already.
One broker moaned: "It is a blow. We had a massive account with Drake."