[Federal Register: January 26, 2006 (Volume 71, Number 17)]
[Proposed Rules]
[Page 4335-4337]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26ja06-23]
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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]
BILLING CODE 3110-01-P