"In a slowing economy, companies can ill afford higher costs, but for those with high concentrations of employees in one location, premium-rate increases of 50 percent are common," says Don Watson, director of financial service ratings for S&P in New York. "We are seeing insurers pulling back from workers comp, and I think there will be more of that as they conclude how difficult it is to write."

S&P blames much of the price increase on the the fact that, unlike most other lines of commercial insurance, workers compensation policies are not allowed to exclude acts of terrorism, and at the same time insurers are unable to dilute that risk by purchasing reinsurance or by relying on a federal backstop for future terrorism losses. This forces workers compensation insurers to reassess the way they price their policies.

In the past, the price of workers compensation insurance generally depended on the insured company's payroll, the type of industry, job functions of workers, number of workers, and the historical claims experience of the company. After Sept. 11, insurers must now consider the possibility of a single event causing an overwhelming number of claims from companies with a high concentration of employees in a single building or geographic area.

"We're aware of a risk that we hadn't really focused on before," says Watson. "The ironic consequence of the World Trade Center incident is that it turns traditional underwriting on its head, where large groups are not necessarily better."

"If you avoid super-trophy buildings like the Sears Tower or the Empire State Building, maybe it's not such a bad risk."

Workers compensation insurers are also concerned about the possibility of mental trauma claims caused by future acts of terrorism, despite the fact that so-called "stress payments" from the World Trade Center have been less than expected, according to S&P.

Going forward, S&P does not expect insurers to pull out of the workers compensation market altogether but sees them implementing higher premium prices and avoiding geographic concentrations of risk. Additionally, new insurers entering the workers compensation market may offset some of the scarcity in workers compensation insurance as they do not have the poor underwriting experiences of insurers before Sept. 11, who priced their insurance too low in hopes of gaining market share.

New companies, set up in Bermuda, are entering the market and providing coverage, and taking advantage of the higher prices, according to Watson. "If you avoid super-trophy buildings like the Sears Tower or the Empire State Building, maybe it's not such a bad risk," he says.