When submitting request for self-insurance plans to the contracting officer, contractors are required to provide, among a long list of other documents, self-insurance feasibility studies or insurance market surveys reporting comparative alternatives, loss history, premiums history, and industry ratios. The point of this is to insure that the costs of self-insurance does not exceed the cost of purchased insurance. Excess self-insurance costs exceeding the cost of comparable purchased insurance is unallowable under FAR 31.205-19(c)(3):
If purchased insurance is available, any self-insurance charge plus insurance administration expenses in excess of the cost of comparable purchased insurance plus associated insurance administration expenses is unallowable.DCMA (Defense Contract Management Agency) has the responsibility under FAR 42.3 for reviewing contractors' insurance coverage. Those reviews are usually limited to verifying that the contractors' insurance program provides appropriate protection in consonance with the types of risks involved. Such reviews, by themselves, do not constitute a sufficient basis for accepting related costs. That's where DCAA (Defense Contract Audit Agency) or other independent contract auditors come in.
When reviewing a contractor's self-insurance program, contract auditors will consider whether the contractor has performed regular (and recent) comparative cost analysis of the self-insurance program with comparable purchased insurance costs. While the contracting officer may have initially approved a contractor's self-insurance plan, after time, the comparative analysis initially submitted may no longer be relevant. And here's where some contractor's have run afoul of the audit process - they have no evidence to show that its self-insurance plan(s) remain cost effective. That is, the costs plus administration expenses for self-insurance, do not exceed the costs of comparable purchased insurance.
Contract auditors will review other aspects of self-insurance plans as well, such as;
- The types of risks covered and the nature of contractors' risk assumptions
- Effectiveness of the claims procedures. For example, are there procedures in place to ensure that payments are made only to valid participants? Children eventually age out and should be removed from participation. In the case of divorce, the spouse should be removed from participation.
- Equity of the accounting treatment of self-insurance costs including how the costs are allocated to final cost objectives.
- Maintenance of the reserve in accordance with CAS 416 (if applicable).
Self-insurance can save contractors a lot of money. But self-insurance plans must be closely monitored to ensure that the costs meet the requirements of FAR 31.205-19 and that claims are not paid out to ineligible participants or for events that are not covered by insurance.