109th CONGRESS
2d Session
S. 3116
To amend the Internal Revenue Code of 1986 to provide for the creation
of disaster protection funds by property and casualty insurance companies
for the payment of policyholders' claims arising from future catastrophic
events.
IN THE SENATE OF THE UNITED STATES
May 25, 2006
Mr. NELSON of Florida introduced the following bill; which was read twice
and referred to the Committee on Finance
A BILL
To amend the Internal Revenue Code of 1986 to provide for the creation
of disaster protection funds by property and casualty insurance companies
for the payment of policyholders' claims arising from future catastrophic
events.
Be it enacted by the Senate and House of Representatives of the United
States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the `Policyholder Disaster Protection Act of 2006'.
SEC. 2. FINDINGS.
The Congress makes the following findings:
(1) Rising costs resulting from natural disasters are placing an increasing
strain on the ability of property and casualty insurance companies to
assure payment of homeowners' claims and other insurance claims arising
from major natural disasters now and in the future.
(2) Present tax laws do not provide adequate incentives to assure that
natural disaster insurance is provided or, where such insurance is provided,
that funds are available for payment of insurance claims in the event
of future catastrophic losses from major natural disasters, as present
law requires an insurer wishing to accumulate surplus assets for this
purpose to do so entirely from its after-tax retained earnings.
(3) Revising the tax laws applicable to the property and casualty insurance
industry to permit carefully controlled accumulation of pretax dollars
in separate reserve funds devoted solely to the payment of claims arising
from future major natural disasters will provide incentives for property
and casualty insurers to make natural disaster insurance available, will
give greater protection to the Nation's homeowners, small businesses,
and other insurance consumers, and will help assure the future financial
health of the Nation's insurance system as a whole.
(4) Implementing these changes will reduce the possibility that a significant
portion of the private insurance system would fail in the wake of a major
natural disaster and that governmental entities would be required to step
in to provide relief at taxpayer expense.
SEC. 3. CREATION OF POLICYHOLDER DISASTER PROTECTION FUNDS; CONTRIBUTIONS
TO AND DISTRIBUTIONS FROM FUNDS; OTHER RULES.
(a) Contributions to Policyholder Disaster Protection Funds- Subsection
(c) of section 832 of the Internal Revenue Code of 1986 (relating to the
taxable income of insurance companies other than life insurance companies)
is amended by striking `and' at the end of paragraph (12), by striking the
period at the end of paragraph (13) and inserting `; and', and by adding
at the end the following new paragraph:
`(14) the qualified contributions to a policyholder disaster protection
fund during the taxable year.'.
(b) Distributions From Policyholder Disaster Protection Funds- Paragraph
(1) of section 832(b) of such Code is amended by striking `and' at the end
of subparagraph (D), by striking the period at the end of subparagraph (E)
and inserting `, and', and by adding at the end the following new subparagraph:
`(F) the amount of any distributions from a policyholder disaster protection
fund during the taxable year, except that a distribution made to return
to the qualified insurance company any contribution which is not a qualified
contribution (as defined in subsection (h)) for a taxable year shall
not be included in gross income if such distribution is made prior to
the filing of the tax return for such taxable year.'.
(c) Definitions and Other Rules Relating to Policyholder Disaster Protection
Funds- Section 832 of such Code (relating to insurance company taxable income)
is amended by adding at the end the following new subsection:
`(h) Definitions and Other Rules Relating to Policyholder Disaster Protection
Funds- For purposes of this section--
`(1) POLICYHOLDER DISASTER PROTECTION FUND- The term `policyholder disaster
protection fund' (hereafter in this subsection referred to as the `fund')
means any custodial account, trust, or any other arrangement or account--
`(A) which is established to hold assets that are set aside solely for
the payment of qualified losses, and
`(B) under the terms of which--
`(i) the assets in the fund are required to be invested in a manner
consistent with the investment requirements applicable to the qualified
insurance company under the laws of its jurisdiction of domicile,
`(ii) the net income for the taxable year derived from the assets
in the fund is required to be distributed no less frequently than
annually,
`(iii) an excess balance drawdown amount is required to be distributed
to the qualified insurance company no later than the close of the
taxable year following the taxable year for which such amount is determined,
`(iv) a catastrophe drawdown amount may be distributed to the qualified
insurance company if distributed prior to the close of the taxable
year following the year for which such amount is determined,
`(v) a State required drawdown amount may be distributed, and
`(vi) no distributions from the fund are required or permitted other
than the distributions described in clauses (ii) through (v) and the
return to the qualified insurance company of contributions that are
not qualified contributions.
`(2) QUALIFIED INSURANCE COMPANY- The term `qualified insurance company'
means any insurance company subject to tax under section 831(a).
`(3) QUALIFIED CONTRIBUTION- The term `qualified contribution' means a
contribution to a fund for a taxable year to the extent that the amount
of such contribution, when added to the previous contributions to the
fund for such taxable year, does not exceed the excess of--
`(A) the fund cap for the taxable year, over
`(B) the fund balance determined as of the close of the preceding taxable
year.
`(4) EXCESS BALANCE DRAWDOWN AMOUNTS- The term `excess balance drawdown
amount' means the excess (if any) of--
`(A) the fund balance as of the close of the taxable year, over
`(B) the fund cap for the following taxable year.
`(5) CATASTROPHE DRAWDOWN AMOUNT-
`(A) IN GENERAL- The term `catastrophe drawdown amount' means an amount
that does not exceed the lesser of the amount determined under subparagraph
(B) or (C).
`(B) NET LOSSES FROM QUALIFYING EVENTS- The amount determined under
this subparagraph shall be equal to the qualified losses for the taxable
year determined without regard to clause (ii) of paragraph (8)(A).
`(C) GROSS LOSSES IN EXCESS OF THRESHOLD- The amount determined under
this subparagraph shall be equal to the excess (if any) of--
`(i) the qualified losses for the taxable year, over
`(I) the fund cap for the taxable year (determined without regard
to paragraph (9)(E)), or
`(II) 30 percent of the qualified insurance company's surplus as
regards policyholders as shown on the company's annual statement
for the calendar year preceding the taxable year.
`(D) SPECIAL DRAWDOWN AMOUNT FOLLOWING A RECENT CATASTROPHE LOSS YEAR-
If for any taxable year included in the reference period the qualified
losses exceed the amount determined under subparagraph (C)(ii), the
`catastrophe drawdown amount' shall be an amount that does not exceed
the lesser of the amount determined under subparagraph (B) or the amount
determined under this subparagraph. The amount determined under this
subparagraph shall be an amount equal to the excess (if any) of--
`(i) the qualified losses for the taxable year, over
`(I) 1/3 of the fund cap for the taxable year (determined without
regard to paragraph (9)(E)), or
`(II) 10 percent of the qualified insurance company's surplus as
regards policyholders as shown on the company's annual statement
for the calendar year preceding the taxable year.
`(E) REFERENCE PERIOD- For purposes of subparagraph (D), the reference
period shall be determined under the following table:
`For a taxable year
The reference period
beginning in--
shall be--
2009 and later
The 3 preceding taxable years.
2008
The 2 preceding taxable years.
2007
The preceding taxable year.
2006 or before
No reference period applies.
`(6) STATE REQUIRED DRAWDOWN AMOUNT- The term `State required drawdown
amount' means any amount that the department of insurance for the qualified
insurance company's jurisdiction of domicile requires to be distributed
from the fund, to the extent such amount is not otherwise described in
paragraph (4) or (5).
`(7) FUND BALANCE- The term `fund balance' means--
`(A) the sum of all qualified contributions to the fund,
`(B) less any net investment loss of the fund for any taxable year or
years, and
`(C) less the sum of all distributions under clauses (iii) through (v)
of paragraph (1)(B).
`(A) IN GENERAL- The term `qualified losses' means, with respect to
a taxable year--
`(i) the amount of losses and loss adjustment expenses incurred in
the qualified lines of business specified in paragraph (9), net of
reinsurance, as reported in the qualified insurance company's annual
statement for the taxable year, that are attributable to one or more
qualifying events (regardless of when such qualifying events occurred),
`(ii) the amount by which such losses and loss adjustment expenses
attributable to such qualifying events have been reduced for reinsurance
received and recoverable, plus
`(iii) any nonrecoverable assessments, surcharges, or other liabilities
that are borne by the qualified insurance company and are attributable
to such qualifying events.
`(B) QUALIFYING EVENT- For purposes of subparagraph (A), the term `qualifying
event' means any event that satisfies clauses (i) and (ii).
`(i) EVENT- An event satisfies this clause if the event is 1 or more
of the following:
`(I) Windstorm (hurricane, cyclone, or tornado).
`(II) Earthquake (including any fire following).
`(III) Winter catastrophe (snow, ice, or freezing).
`(VII) Volcanic eruption.
`(ii) CATASTROPHE DESIGNATION- An event satisfies this clause if the
event--
`(I) is designated a catastrophe by Property Claim Services or its
successor organization,
`(II) is declared by the President to be an emergency or disaster,
or
`(III) is declared to be an emergency or disaster in a similar declaration
by the chief executive official of a State, possession, or territory
of the United States, or the District of Columbia.
`(A) IN GENERAL- The term `fund cap' for a taxable year is the sum of
the separate lines of business caps for each of the qualified lines
of business specified in the table contained in subparagraph (C) (as
modified under subparagraphs (D) and (E)).
`(B) SEPARATE LINES OF BUSINESS CAP- For purposes of subparagraph (A),
the separate lines of business cap, with respect to a qualified line
of business specified in the table contained in subparagraph (C), is
the product of--
`(i) net written premiums reported in the annual statement for the
calendar year preceding the taxable year in such line of business,
multiplied by
`(ii) the fund cap multiplier applicable to such qualified line of
business.
`(C) QUALIFIED LINES OF BUSINESS AND THEIR RESPECTIVE FUND CAP MULTIPLIERS-
For purposes of this paragraph, the qualified lines of business and
fund cap multipliers specified in this subparagraph are those specified
in the following table:
`Line of Business on Annual
--Fund Cap
Statement Blank:
--Multiplier:
-- 0.25
-- 1.25
Farmowners Multiple Peril
-- 0.25
Homeowners Multiple Peril
-- 0.75
Commercial Multi Peril (non-liability portion)
-- 0.50
--13.00
-- 0.25.
`(D) SUBSEQUENT MODIFICATIONS OF THE ANNUAL STATEMENT BLANK- If, with
respect to any taxable year beginning after the effective date of this
subsection, the annual statement blank required to be filed is amended
to replace, combine, or otherwise modify any of the qualified lines
of business specified in subparagraph (C), then for such taxable year
subparagraph (C) shall be applied in a manner such that the fund cap
shall be the same amount as if such reporting modification had not been
made.
`(E) 20-YEAR PHASE-IN- Notwithstanding subparagraph (C), the fund cap
for a taxable year shall be the amount determined under subparagraph
(C), as adjusted pursuant to subparagraph (D) (if applicable), multiplied
by the phase-in percentage indicated in the following table:
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`Taxable year beginning in: Phase-in percentage to be applied to fund cap computed under subparagraphs (A) and (B):
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2006 5 percent
2007 10 percent
2008 15 percent
2009 20 percent
2010 25 percent
2011 30 percent
2012 35 percent
2013 40 percent
2014 45 percent
2015 50 percent
2016 55 percent
2017 60 percent
2018 65 percent
2019 70 percent
2020 75 percent
2021 80 percent
2022 85 percent
2023 90 percent
2024 95 percent
2025 and later 100 percent
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`(10) TREATMENT OF INVESTMENT INCOME AND GAIN OR LOSS-
`(A) CONTRIBUTIONS IN KIND- A transfer of property other than money
to a fund shall be treated as a sale or exchange of such property for
an amount equal to its fair market value as of the date of transfer,
and appropriate adjustment shall be made to the basis of such property.
Section 267 shall apply to any loss realized upon such a transfer.
`(B) DISTRIBUTIONS IN KIND- A transfer of property other than money
by a fund to the qualified insurance company shall not be treated as
a sale or exchange or other disposition of such property. The basis
of such property immediately after such transfer shall be the greater
of the basis of such property immediately before such transfer or the
fair market value of such property on the date of such transfer.
`(C) INCOME WITH RESPECT TO FUND ASSETS- Items of income of the type
described in paragraphs (1)(B), (1)(C), and (2) of subsection (b) that
are derived from the assets held in a fund, as well as losses from the
sale or other disposition of such assets, shall be considered items
of income, gain, or loss of the qualified insurance company. Notwithstanding
paragraph (1)(F) of subsection (b), distributions of net income to the
qualified insurance company pursuant to paragraph (1)(B)(ii) of this
subsection shall not cause such income to be taken into account a second
time.
`(11) NET INCOME; NET INVESTMENT LOSS- For purposes of paragraph (1)(B)(ii),
the net income derived from the assets in the fund for the taxable year
shall be the items of income and gain for the taxable year, less the items
of loss for the taxable year, derived from such assets, as described in
paragraph (10)(C). For purposes of paragraph (7), there is a net investment
loss for the taxable year to the extent that the items of loss described
in the preceding sentence exceed the items of income and gain described
in the preceding sentence.
`(12) ANNUAL STATEMENT- For purposes of this subsection, the term `annual
statement' shall have the meaning set forth in section 846(f)(3).
`(13) EXCLUSION OF PREMIUMS AND LOSSES ON CERTAIN PUERTO RICAN RISKS-
Notwithstanding any other provision of this subsection, premiums and losses
with respect to risks covered by a catastrophe reserve established under
the laws or regulations of the Commonwealth of Puerto Rico shall not be
taken into account under this subsection in determining the amount of
the fund cap or the amount of qualified losses.
`(14) REGULATIONS- The Secretary shall prescribe such regulations as may
be necessary or appropriate to carry out the purposes of this subsection,
including regulations--
`(A) which govern the application of this subsection to a qualified
insurance company having a taxable year other than the calendar year
or a taxable year less than 12 months,
`(B) which govern a fund maintained by a qualified insurance company
that ceases to be subject to this part, and
`(C) which govern the application of paragraph (9)(D).'.
(d) Effective Date- The amendments made by this section shall apply to taxable
years beginning after December 31, 2005.
END
