[Federal Register Volume 76, Number 166 (Friday, August 26, 2011)]
[Proposed Rules]
[Pages 53378-53379]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-21898]


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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9904


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.

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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: 410-786-6381).

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.''

[[Page 53379]]

    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.
[FR Doc. 2011-21898 Filed 8-25-11; 8:45 am]
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