Though most cost accounting standards apply to allocation as opposed to allowability questions, CAS 416 provides prescriptions for how self insurance costs should be computed which comes mighty close to allowability. Any contractor that establishes a program of self-insurance must comply with the requirements of CAS 416. If it is anticipated that 50% or more of the self insurance costs to be incurred at a business segment is allocable to negotiated government contracts and those self-insurance costs will exceed $200,000 the contractor must submit written information regarding the proposed self insurance program to the ACO and obtain approval of the plan.

CAS 416 provides detailed criteria for measuring insurance costs and assigning them to periods and cost objectives (contracts or indirect cost pools). For purchased insurance, premiums must be assigned to cost accounting periods on a pro rata basis. Any refund, dividend or additional assessment must be an adjustment to the pro rata premium cost for the earliest period in which the refund or dividend is actually received or in which the added assessment is payable. Where insurance is purchased for a specific cost objective and the costs are directly allocable to it, the premium need not be pro rated between accounting periods.

For self insurance, CAS 416 provides the contractor will make a self insurance charge for each period for each type of self insured risk. The charge is to represent the projected average loss for the period. If insurance could be purchased against self-insured risk the cost of such insurance may be used as an estimate of the projected loss; if this method is used, the self-insurance charge plus insurance administration expenses cannot exceed the cost of comparable purchased insurance. If insurance cannot be purchased, the amount of the self-insurance charge for each period is to be based on the contractor’s actual experience, relevant industry experience and anticipated conditions in accordance with accepted actuarial principles.

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