Cost Accounting Standards Board; Accounting for Insurance Costs, 4335-4337 [E6-975]

Agencies

• Office of Management and Budget
• Office of Federal Procurement Policy
• Federal Procurement Policy Office

[Federal Register Volume 71, Number 17 (Thursday, January 26, 2006)]
[Proposed Rules]
[Pages 4335-4337]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-975]


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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9904


Cost Accounting Standards Board; Accounting for Insurance Costs

AGENCY: Cost Accounting Standards Board, Office of Federal Procurement 
Policy, OMB.

ACTION: Staff discussion paper.

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SUMMARY: The Cost Accounting Standards (CAS) Board, Office of Federal 
Procurement Policy, invites public comments on the staff discussion 
paper (SDP) regarding CAS 416, ``Accounting for Insurance Costs.'' In 
particular, this staff discussion paper addresses the use of the term 
``catastrophic losses'' in CAS 416-50(b)(1).

DATES: Comments must be in writing and must be received by March 27, 
2006.

ADDRESSES: Due to delays in OMB's receipt and processing of mail, 
respondents are strongly encouraged to submit comments electronically 
to ensure timely receipt. Electronic comments may be submitted to 
casb2@omb.eop.gov. Please put the full body of your comments in the 
text of the electronic message and also as an attachment readable in 
either MS Word or Corel WordPerfect. Please include your name, title, 
organization, postal address, telephone number, and e-mail address in 
the text of the message. Comments may also be submitted via facsimile 
to (202) 395-5105.

FOR FURTHER INFORMATION CONTACT: Rein Abel, Cost Accounting Standards 
Board (telephone: 202-395-3254).

SUPPLEMENTARY INFORMATION:

A. Regulatory Process

    The Board's rules, regulations and Standards are codified at 48 CFR 
Chapter 99. The Office of Federal Procurement Policy Act, 41 U.S.C. 
422(g)(1), requires the Board, prior to the establishment of any new or 
revised CAS, to complete a prescribed rulemaking process. The process 
generally consists of the following four steps:
    1. Consult with interested persons concerning the advantages, 
disadvantages and improvements anticipated in the pricing and 
administration of government contracts as a result of the adoption of a 
proposed Standard (e.g., prepare and publish a SDP).
    2. Promulgate an Advance Notice of Proposed Rulemaking (ANPRM).
    3. Promulgate a Notice of Proposed Rulemaking (NPRM).
    4. Promulgate a Final Rule.
    This SDP is issued by the Board in accordance with the requirements 
of 41 U.S.C. 422(g)(1)(B), and is step one of the four-step process.

B. Background and Summary

    The Office of Federal Procurement Policy, Cost Accounting Standards 
Board, is releasing a SDP on the use of the term ``catastrophic 
losses'' in CAS 416-50(b)(1). Section 26(g)(1) of the Office of 
Procurement Policy Act, 41 U.S.C. 422(g)(1), requires that the Board, 
prior to the promulgation of any new or revised CAS, consult with 
interested persons concerning the advantages, disadvantages, and 
improvements anticipated in the pricing and administration of 
Government contracts as a result of the adoption or revision of an 
existing Standard. The purpose of the SDP is to solicit public views 
with respect to the Board's consideration of whether the word 
``catastrophic'' should be replaced with a term such as ``significant'' 
or ``very large'' in 48 CFR 9904.416-50(b)(1) in order to (a) more 
closely align the Standard with what was intended by its original 
promulgators and (b) eliminate any confusion between 48 CFR 9904.416 
and FAR 31.205-19, Insurance cost.

[[Page 4336]]

Respondents are encouraged to identify and comment on any issues not 
addressed in this SDP that they believe are important to the subject. 
This SDP reflects research accomplished to date by the staff of the CAS 
Board in the respective subject area and is issued by the Board in 
accordance with the requirements of 41 U.S.C. 422(g)(1)(A).

C. Public Comments

    Interested persons are invited to participate by submitting data, 
views or arguments with respect to this SDP, including but not limited 
to the questions listed in the SDP. All comments must be in writing or 
by e-mail, and submitted to the mailing or e-mail addresses indicated 
in the ADDRESSES section.

Joshua B. Bolten,
Director.

Cost Accounting Standards Board Staff Discussion Paper (SDP) CAS 416--
Catastrophic Losses

Background

Purpose
     The purpose of this SDP is to explore whether the word 
``catastrophic'' in CAS 416-50(b)(1) should be replaced with a term 
such as ``significant'' or ``very large'' to (a) more closely align the 
Standard with what was intended by its original promulgators and (b) 
eliminate any potential confusion between CAS 416 and FAR 31.205-19.
CAS 416
     In February, 1976, the CAS Board staff distributed to the 
public an issues paper on accounting for insurance costs. The staff 
received 59 responses to the issues paper. An analysis of those 
responses and a draft Standard were presented to the Board at its 
meeting of December 20, 1976.
     On January 13, 1977, the draft Standard was distributed to 
the public. The staff received 64 responses to the draft Standard.
     An analysis of the major issues raised by the public was 
addressed in Staff Technical Paper Number 38, dated August 23, 1977. 
The staff technical paper included the following discussion related to 
the allocation of catastrophic losses:

    The staff draft standard required that a loss be allocated only 
to the segment in which it occurred. Twelve respondents objected to 
this provision. They pointed out that the home office can 
legitimately act as a re-insurance of a small segment against 
catastrophic losses; otherwise, small segments might find it 
necessary to purchase outside insurance to protect them. The Staff 
concurs in this objection; the proposed Standard now provides that a 
portion of catastrophic losses may be allocated to the home office.
     On September 20, 1978, the CAS Board published CAS 416, 
which included language on catastrophic losses at CAS 416.50((b)(1). 
This language, which has remained unchanged since that publication, 
reads as follows:

    (b) Allocation of insurance costs. (1) Where actual losses are 
recognized as an estimate of the projected average loss in 
accordance with 9904.416-50(a)(2), or where actual loss experience 
is determined for the purpose of developing self-insurance charges 
by segment, a loss which is incurred by a given segment shall be 
identified with that segment. However, if the contractor's home 
office is, in effect, a reinsurer of its segments against 
catastrophic losses, a portion of such catastrophic losses shall be 
allocated to, or identified with, the home office.

     In the September 20, 1978 publication of CAS 416, 
paragraph (6) of Preamble A included the following discussion of the 
use of the term ``catastrophic losses'' in the Standard:

    Two respondents asked that the standard define or prescribe 
criteria for determining when a loss is considered to be 
``catastrophic'' for purposes of home-office reinsurance agreements; 
they were concerned about after-the-fact disagreement as to whether 
a particular loss was ``catastrophic'' and thereby to be allocated 
in part to the home office, or ``noncatastrophic'' and to be 
absorbed entirely by the segment. The Board believes that what 
constitutes ``catastrophic loss'' depends on the individual 
circumstances of each contractor. The determination should be made 
at the time the internal loss-sharing policy is established and 
should be revised, as necessary, for changes in future 
circumstances. Obviously, a catastrophic loss would be one which 
would be very large in relation to the average loss per occurrence 
for that exposure, and losses of that magnitude would be expected to 
occur infrequently.
FAR 31-205-19
     The language currently at FAR 31.205-19(c)(4), which was 
originally promulgated under DAR Case 78-400-07, reads as follows:

    Self-insurance charges for risks of catastrophic losses are 
unallowable.

     The March 19, 1979 report on DAR Case 78-400-7 stated that 
the purpose of the language was to assure that the Government did not 
allow self-insurance charges for catastrophic losses, such as 
earthquakes, which have a very small likelihood of occurring for any 
particular contractor.
     In early 2001, the Director of Defense Procurement 
requested the views of interested parties on potential areas for 
revising FAR Part 31 in light of the evolution of Generally Accepted 
Accounting Principles, the advent of Acquisition Reform, and experience 
gained from implementation of FAR Part 31. A series of public meetings 
was held during spring 2001 to discuss potential opportunities for 
revising the provisions in FAR Part 31 relating to cost measurement, 
assignment, and allocation. Attendees included representatives from 
industry, Government, and other interested parties.
    The public meetings resulted in a number of recommendations for 
revising FAR Part 31, including a recommendation to address the issue 
of catastrophic insurance at FAR 31.205-19, Insurance Costs. One 
commenter at the public meeting noted that a literal reading of FAR and 
CAS would result in the following:
    [cir] In accordance with CAS 416.50(b)(1), a contractor can 
reinsure the losses of a segment at the home office only if these are 
catastrophic losses.
    [cir] FAR 31.205-19 disallows self-insurance charges for 
catastrophic losses.
    [cir] Therefore, any reinsurance of catastrophic losses by the home 
office under CAS 416 would be unallowable under FAR 31.205-19.
     On January 30, 2003, in an attempt to address the 
situation raised by the public commenter, the FAR Council published a 
proposed rule in the Federal Register (68 FR 4880). The proposed rule 
was intended to distinguish the FAR concept of catastrophic losses from 
the reinsurance concepts in CAS 416 by amending FAR 31.205-19 to define 
the term ``catastrophic losses'' as ``large dollar coverage with a very 
low frequency of loss.''
    Several public commenters objected to the FAR Council's proposed 
amendment, asserting that the definition in the proposed rule could be 
interpreted to include deductibles or over ceiling amounts for property 
and other high dollar insurance policies. The public commenters further 
contended that the proposed definition of catastrophic losses would 
cause contention and uncertainty in the field because it did not 
account for differences in what constitutes a large loss among 
different sized contractors. The commenters also asserted that 
including ``very low frequency of loss'' in the definition would cause 
confusion. The commenters recommended deleting the proposed definition 
and continuing the use of existing practices that rely upon individual 
circumstances and general reasonableness.

[[Page 4337]]

     After analyzing the public comments, the FAR Council 
withdrew the proposed definition. In recommending withdrawal of the 
rule, the June 26, 2003 report of the FAR Part 31 Streamlining 
Committee noted the following:

    Upon further review, the Committee recommends that the proposed 
definition of catastrophic losses be deleted from the final rule. 
The Committee continues to believe that the proposed definition is 
consistent with the intent of the promulgators of the current 
language, as evidenced by the March 19, 1979 Committee report 
underlying DAR Case 78-400-7.
    The intent of the proposed coverage was to distinguish 
catastrophic losses as used in the cost principle from the type of 
catastrophic loss anticipated by the illustration at CAS 416.60(h). 
In that illustration, motor vehicle liability losses in excess of a 
specified amount were absorbed by the home office and reallocated to 
all segments. In the particular case described, the specified amount 
was too low based on loss experience to be considered catastrophic 
under the provisions of CAS 416. However, the illustration appears 
to anticipate losses that may be catastrophic to a particular 
segment of a company but not necessarily catastrophic in a more 
general sense. The Committee does not believe the drafters of the 
cost principle intended to disallow self-insurance charges for the 
type of loss anticipated by the CAS illustration. However, since CAS 
does not include a definition of catastrophic loss, defining the 
term in FAR could cause confusion by the users of these regulations.
    As to the commenter's recommendation that self-insurance charges 
for catastrophic losses should be allowable, the Committee 
disagrees. As was noted in the report on DAR Case 78-400-7, the 
Government should not allow self-insurance charges for catastrophic 
losses, such as earthquakes, which have a very small likelihood of 
occurring for any particular contractor.

Key Questions for Consideration

    The CAS Board is soliciting comments on this issue from interested 
parties. In particular, the Board is interested in comments related to 
the following questions:
    1. Do contractors and contracting agencies currently interpret the 
term ``catastrophic losses'' differently when applying CAS 416.50(b)(1) 
and FAR 31.205-19(e)? If so, how does the use of the term differ 
between the two applications?
    2. Under CAS 416.50(b)(1), the contractor is required to assign 
insurance costs on the basis of the projected average loss. Actual 
losses cannot be used unless they approximate the projected average 
loss. FAR 31.205-19(c)(4) disallows self-insurance costs for 
catastrophic losses. Thus, if the term ``catastrophic losses'' is 
interpreted as having the same meaning in both CAS and FAR, how does a 
contractor recover amounts related to catastrophic losses, since the 
costs cannot be assigned based on actual costs under CAS (and therefore 
are not allowable as actual costs), and the costs are unallowable as 
self-insurance charges under FAR?
    3. How does the insurance industry use the term ``catastrophic 
losses?''
    4. How does the insurance industry's use of the term ``catastrophic 
losses'' differ from its use in CAS and FAR, if any?
    5. Have there been problems in the implementation of CAS 
416.50(b)(1) as a result of the use of the term ``catastrophic?''
    6. Provide any examples of instances where the use of the term 
``catastrophic'' has resulted in contract disputes. For each example 
provided, include the nature of the dispute and the resolution.
    7. Provide any comments as to whether the language at CAS 
416.50(b)(1) should be revised. If the recommendation is to revise the 
language, please provide suggested revisions.
    8. Provide any comments regarding use of the term ``extraordinary 
item'' as used in Generally Accepted Accounting Principles in lieu of 
the term ``catastrophic insurance.''

[FR Doc. E6-975 Filed 1-25-06; 8:45 am]
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