At least four life and health insurance companies have decided to stop doing business in the District rather than comply with recently approved legislation that would prohibit insurers from denying coverage to persons who test positive for exposure to the AIDS virus.

Other companies, including Prudential, the nation's largest provider of life insurance, said they are weighing their options and have not ruled out the possibility that they may cease writing policies here.

"The risk is tremendous. The economic risk is huge. We are not willing to bet our company just to stay in a small market," said Herbert L. DePrenger, president of life insurance affiliates for Geico, one of the area's largest insurers. "We will no longer accept applications from people in the District."

Industry officials said it is too soon to know how widespread defections from the District insurance market will be over the AIDS measure. The city could lose revenue from taxes on insurance premiums, while companies will lose a source of policies.

Companies that refuse to comply with the law will be unable to conduct life insurance business in the city. D.C. residents who wish to buy a policy from those companies will have to travel to another jurisdiction.

"I think there's going to be a trickle of companies withdrawing. But whether or not it's going to be a large exodus is too early to tell," said Leslie Jackson of the D.C. Life Underwriters Association.

D.C. Council member Frank Smith (D-Ward 1) responded angrily yesterday when informed that some companies are discontinuing their operations here.

"I think we should look at whether they should be banned or penalized. I think this is irresponsible," he said.

"I don't think they should be able to pick and choose, or to insure just people who are healthy," Smith added. "The insurance business is a risk-oriented business and people who are not interested should go and become farmers."

Recent changes to the liability insurance law in West Virginia resulted in companies canceling thousands of policies in the state and required a special session of the legislature to avert an insurance crisis there.

The life and health insurance bill approved by the D.C. Council is the most far-reaching in the country in protecting individuals exposed to the AIDS virus. Many insurance companies have begun testing for the presence of antibodies indicating exposure to the virus and it is difficult or impossible for some applicants who test positive to obtain life or health coverage.

Industry officials say the D.C. bill gives preferential treatment to AIDS carriers over other clients who have health risks, and that unaffected customers would have to shoulder the burden of higher premiums if companies are forced to pay claims to AIDS victims.

In all, 604 companies are licensed to sell life and health policies in the city and the District collects nearly $15 million annually in taxes on premiums.

The quickest decisions to pull out of the city appear to have been made by companies that have only small shares of the insurance business here and are narrowly focused in the life and health area, rather than those offering a broad range of coverage.

Of the 4,000 new policies that Geico sold last year, for example, only 6 percent were sold to District residents, DePrenger said. Most of the remaining policies were sold in Virginia and Maryland.

Officials at Golden Rule Life, an Illinois company that had planned to open a regional marketing office in the District for health policies, said they have scrapped their plans because of the AIDS measure.

"Everything that's coming out about AIDS gets worse and worse. Until something gets done, we can't accept those risks. We don't feel it's fair to the other insured and our stockholders," said John Jaskot, vice president of Bankers Security here, which sold 24 policies in the city last year.

"The law essentially takes away our ability to underwrite in a normal fashion as we would for any other disease," said Albert Cornelio, president of Berkshire Life in Pittsfield, Mass. "For a company such as Berkshire, that is a risk we just can't handle . . . . We can't sell competitive-priced products with rather severe losses. In a sense, it's a tragedy."

Cornelio estimated that Berkshire wrote about 100 policies here last year and collected $323,000 in premiums.

Officials at some of the largest companies said they are weighing the risks against their revenue in the District, and what pulling out might mean to their agents who also sell other forms of insurance.

"We are definitely concerned with the legislation that's passed and the implications in Washington," said Steve Rish, a vice president of Nationwide Insurance in Columbus, Ohio. "If companies become inundated with applications and claims, any company would have to reevaluate their continuing to do business in the District of Columbia."