2011-21898. Cost Accounting Standards: Accounting for Insurance Costs

AGENCY:

Cost Accounting Standards Board (Board), Office of Federal Procurement Policy (OFPP), Office of Management and Budget (OMB).

ACTION:

Notice of Discontinuation of Rulemaking.

SUMMARY:

The Office of Federal Procurement Policy (OFPP), Cost Accounting Standards (CAS) Board, is providing public notification of the decision to discontinue the rulemaking on the development of an amendment to Cost Accounting Standard (CAS) 416 regarding the use of the term “catastrophic losses” at 48 CFR 9904.416-50(b)(1).

FOR FURTHER INFORMATION CONTACT:

Eric Shipley, Project Director, Cost Accounting Standards Board (telephone: [phone]).

SUPPLEMENTARY INFORMATION:

A. Regulatory Process

Rules, Regulations and Standards issued by the Cost Accounting Standards Board (Board) are codified at 48 CFR chapter 99. The Office of Federal Procurement Policy Act, at 41 U.S.C. 1502(c) [formerly, 41 U.S.C. 422(g)], requires the Board, prior to the establishment of any new or revised Cost Accounting Standard, to complete a prescribed rulemaking process. The process generally consists of four steps.

The Board has already completed step one of the statutory rulemaking process, which requires the Board to 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. This notice announces the discontinuation of the rulemaking after completing step one of the four-step process in accordance with the requirements at 41 U.S.C. 1502(c).

B. Background and Summary

Prior Promulgations

In a letter dated September 26, 2000, the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics requested that the Board consider whether the word “catastrophic” in the term “catastrophic losses” should be replaced with a term such as “significant” or “very large” in 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 9904.416-50(b)(1) and FAR 31.205-19, Insurance cost. At its May 13, 2005 meeting, the CAS Board directed the staff to begin work on a Staff Discussion Paper (SDP). On January 26, 2006, the Board published the SDP, “Accounting for Insurance Costs” (71 FR 4335) which in particular, addressed the use of the term “catastrophic losses” in CAS 416.

Public Comments

The Board received public comments from two respondents to the SDP. One respondent was concerned whether the term “catastrophic losses” is intended to create a classification of event characterized by rare occurrence and significant loss, or whether it is only the magnitude of a given loss that is defining as “catastrophic.” This respondent believed that self-insurance should be an acceptable method to cover catastrophic losses, such as earthquakes and wind damage, as well as “other significant and non-recurring losses such as unusually large medical claims, major fires, or other losses that are significantly higher than might normally be expected.” A primary concern was that “the FAR, however, does not definitively address their allowability and CAS is unclear how costs for such significant actual self insured losses are to be measured and reflected in projected annual average losses.”

The other respondent recommended that the CAS Board take no further action and close this case. This respondent referred to the observation in the SDP that FAR 31.205-19 and CAS 416 both use the word “catastrophic” to refer to infrequent and unpredictable events involving major losses. The respondent believed there is no conflict between allocability under CAS 416 and allowability under FAR 31.205-19(e), explaining his belief as follows:

CAS 416 controls the measurement and allocation of the cost of infrequent and difficult to predict events. The FAR at 31.205-19(e) and 28.308 disallow the cost unless the Government accepts the risk and associated cost of such infrequent and difficult to predict events.

Neither respondent provided any data or other information describing disputes or other problems arising from the use of the term “catastrophic losses” in 9904.416-50(b)(1).

Response

In deciding to discontinue rulemaking on this case, the Board reviewed the history of the development of the CAS and the FAR provisions on the term “catastrophic losses.” The CAS Board was clearly addressing the allocation of large losses from infrequent and unpredictable events in paragraph (6) of the preamble to CAS 416 (43 FR 42239, September 20, 1978), which stated:

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.

9904.416-50(b)(1) treats “catastrophic losses” as a contingency and recognizes the cost of “catastrophic losses” separately from the projected average loss, or actual loss experience if used. This treatment is consistent with general insurance practices that exclude catastrophic losses from the insurable risk covered by an insurance policy. As part of its cost accounting practices the contractor establishes the threshold for reinsuring a portion of the catastrophic loss which might occur at a segment. The Board explained in the preamble that the reinsurance arrangement can reflect the relative size and activities of 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.

Notwithstanding the description of the issue in the SDP, there does not appear to be a substantive difference between the implied definition of the term “catastrophic losses” in 9904.416-50(b)(1) and FAR 31.205-19. The Board believes that the deliberations and actions of the original Board adequately address the narrow question of how the term “catastrophic losses” is used in 9904.416-50(b)(1). Questions of allowability under FAR 31.205-19 are beyond the purview of the Board.

Conclusions

After reviewing the comments and the history of the CAS rules, the Board believes use of the term “catastrophic losses” in CAS 416 is consistent with the intent of its original promulgators that a “catastrophic loss” is “very large in relation to the average loss per occurrence for that exposure,” is “expected to occur infrequently,” and is dependent “on the individual circumstances of each contractor.” The original promulgators intended the definition of what constitutes a “catastrophic loss” be part of the contractor's cost accounting practice where the determination of what constitutes a catastrophic loss “should be made at the time the internal loss-sharing policy is established and should be revised, as necessary, for changes in future circumstances.” (See Preamble to CAS 416 (43 FR 42239, Sept. 20, 1978).)

Although CAS 416 has been in effect for over 30 years, the respondents provided no data on problems or disputes related to the meaning of the term “catastrophic losses.” At this time, the Board believes that no amendments to CAS 416 regarding the use of the term “catastrophic losses” are necessary and is hereby discontinuing further rulemaking in this case.

Daniel I. Gordon,

Chair, Cost Accounting Standards Board.