STRUGGLING airlines are set to demand millions of pounds worth of refunds from their insurers in an attempt to limit the impact of the severe acute respiratory syndrome (Sars) virus on their already weakened balance sheets.

Airlines buy adjustable insurance policies, allowing them to claim back premiums paid up front if passenger numbers are sharply lower than expected.

Airlines operating in Asia have been forced to scale back flights amid the Sars outbreak, as passenger numbers slumped by as much as 50 per cent in some regions.

Steve Lloyd, managing director of the aviation practice at Marsh, the world’s largest insurance broker, said: “Sars is a far, far bigger issue for airlines than the war in Iraq.”

He said increasing numbers of airlines were revisiting insurance contracts negotiated before the outbreak of Sars and many would be due refunds on premium levels set before passenger numbers went into freefall.

Mr Lloyd said: “There is a time lag on this and we’re only just beginning to see it come through. But if the situation with Sars continues, it will have a marked effect on the level of income that insurers thought they were getting for the year.”

Insurers reap up to £3 billion in premiums from insuring airlines. Mr Lloyd said it was too early to say how much the Sars virus would cost the industry, but he gave warning that the bill would result in higher rates for airlines on all routes.

Several Lloyd’s of London insurers are in the aviation insurance market including Amlin, Ace and Wellington.