[Congressional Record Volume 145, Number 158 (Wednesday, November 10, 1999)]
[Senate]
[Pages S14561-S14562]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. MACK (for himself and Mrs. Hutchison):
  S. 1914. 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; to the Committee on Finance.


                  policyholder disaster protection act

 Mr. MACK. Mr. President, I rise today to address a problem 
that ought to be a concern to all of us: natural disasters and the 
exposure of the private insurance industry to catastrophic risks. In my 
state of Florida, we have a particular concern about hurricane risk, 
but many areas of the country are exposed to the risks of other major 
catastrophes--whether they be volcanoes, earthquakes or tornadoes. 
Increasingly, I am concerned about the state of the private insurance 
industry and its ability to withstand a major catastrophe--a 
catastrophe of Hurricane Andrew size ($15 billion in insured losses) or 
greater.
  Today, I am introducing legislation to help address this problem and 
strengthen disaster protection for homeowners and businesses while 
protecting the interests of the taxpayer. I am pleased my friend from 
Texas, Senator Hutchison, has joined me in this effort. I believe our 
approach is an innovative, private-sector solution to the problem of 
catastrophic risk and I encourage my colleagues to review this proposal 
carefully.
  Consumers of property and casualty insurance must be able to rely on 
their insurers for protection against the risk of catastrophic loss. 
However, protection for policyholders in today's system is weak; a 
major future catastrophe could leave consumers without protection and--
if past experience is any indication--the government would intervene to 
ensure the people in the disaster areas receive timely compensation. It 
is important to note that current law actually poses a disincentive for 
insurers to set aside special reserves for catastrophic events. Any 
money set aside to cover potential risk is considered taxable income. 
To fix this flaw in America's insurance system, we need to provide 
incentives for insurers to set aside a portion of their policy premiums 
in secure reserve funds that will be available to meet policyholder 
needs in the event of future catastrophes. Our bill does just that.
  The typical property and casualty insurance company in the United 
States is exposed to multiple forms of catastrophic risk. This risk can 
take the form of major disasters that occur only once in a decade or 
once in several decades (e.g., severe earthquakes, major hurricanes). 
These can also be in the form of localized natural disasters (e.g., 
tornadoes, wildfires, floods, winter storms) that cause unusually large 
policyholder losses in a region and imperil the ability of smaller 
insurance companies to help their policyholders in the area.
  The nation's exposure to these large natural disasters is staggering. 
While millions of families and small businesses rely on insurance 
payments to recover from natural disasters, it is important to remember 
that--under our current insurance tax and regulatory systems--many 
private insurers may not be able to pay all claims arising from a major 
disaster. Hurricane Andrew and the Northridge Earthquake opened our 
eyes to the country's massive exposure to catastrophic losses. Insured 
losses in my state from Hurricane Andrew exceeded $15 billion. But if 
this storm had passed over Miami, rather than Homestead just 40 miles 
south, insured losses could have reached $50 billion, leaving the 
Florida economy crippled and more than a third of all insurers in that 
market insolvent.
  There is always the potential for a major disaster in any given year 
in the United States. Estimates of insured losses from highly probable 
events range from about $75 billion in California and Florida to $100 
billion or more in areas of the Midwest. The Gulf, Intermountain West, 
and Atlantic states all face exposures of approximately $20 billion or 
more.
  Unfortunately, our current system of tax laws and accounting rules 
work against consumers and taxpayers because they discourage private 
market preparation for future major disasters. Present tax laws do not 
permit portions of consumers' insurance policy payments to be set aside 
and tax deferred in order to provide for the risk of truly catastrophic 
loss events. Ironically, our tax system allows insurers to set aside 
funds on a tax-deductible basis to address disasters that have already 
happened but it gives them no incentive to prepare for those major 
disasters that have not yet happened.
  Policyholder premiums needed to fund policyholders' catastrophic 
losses in future years are subject to current tax if not used in a 
particular year. This diminishes the power of insurers to protect 
policyholders against future losses. This structure is inadequate for 
assuring that property-casualty policies will protect consumers from 
future major catastrophic losses.
  The tax law should be revised in order to make accommodation for 
disaster protection reserves and bring about a more practical, and 
sensible, system for insurance companies and consumers.
  Under the Policyholder Disaster Protection Act, insurers could set 
aside portions of policyholder payments in a tax-deferred disaster 
protection fund. Amounts from this fund used to pay for losses from a 
major disaster would be subject to taxation. This concept is similar to 
programs presently in place in many other developed countries.
  I believe this legislation would result in greater stability for 
insurers providing catastrophic coverage and fewer insolvencies after a 
major disaster. A recent study by a major U.S. accounting firm 
determined that approximately $21 billion in pre-funded reserves would 
be accumulated within the first ten years of the program.

[[Page S14562]]

Also, the tax incentive in the bill will encourage insurers to serve 
disaster-prone areas in a responsible manner by setting aside funds to 
pay for major losses.
  The treatment of the fund by insurers would be closely regulated. 
Following is a general description of the provisions of the bill:
  Insurers would be able to set aside special tax-deferred reserves to 
cover potential catastrophic events.
  The maximum amount any insurer could set aside in a given year would 
be determined by reference to each insurance company's exposure to the 
risk of catastrophic loss events.
  Deductible contributions to disaster protection funds would be 
voluntary, but would be irrevocable once made (except to the extent of 
``drawdowns'' for actual catastrophic loss events, or drawdowns 
otherwise required by state insurance regulators). No company could use 
these funds to shelter income from taxation.
  The maximum allowable reserve for any given company will increase or 
decrease as they enter or exit lines of business that pose catastrophic 
risk.
  Insurers would only be allowed to drawdown the disaster reserves if 
the loss event in question is declared an emergency or disaster by 
certain recognized bodies or government officials (for example, a 
disaster declared by the President under the Stafford Act) and that 
losses in a year exceed the specified high level. The amounts 
distributed from the fund are added to company's taxable income for the 
year in which the drawdown occurred.
  Insurance companies would pay taxes on income generated when funds in 
the disaster reserve are invested. This income would be distributed out 
of the fund to the insurance company and taxed to the company on a 
current basis.
  The maximum reserve (or ``cap'') would be phased in at the rate of 
five percent per year over 20 years. Industry estimates indicate 
private reserves of $40 billion would be built up over this time.
  Various concepts to address the problem of catastrophic losses have 
been proposed over the years. I look forward to working with all of my 
colleagues to craft a comprehensive solution to both the short-term and 
long-term problems presented by the risk of catastrophic disasters. In 
my view, the private-sector focus of this bill, which puts a 
strengthened private insurance market for consumers in the forefront of 
disaster protection, is an approach designed to ensure disaster relief 
is efficient and cost-effective for taxpayers. While the federal 
government may still need to provide last-resort safety net for 
disaster victims, it is important to do what we can to ensure private 
insurance is available, affordable and secure for those citizens in 
those areas of the country at risk to a catastrophic disaster. This 
bill will help to bring precisely that availability, affordability and 
security to insurance policyholders throughout the country, and I 
believe it is worthy of support and consideration.
  The bill we're introducing today mirrors a bill introduced by 
Congressman Foley and Matsui in the House of Representatives. It is 
also supported by taxpayer, homeowner, consumer, business and emergency 
service organizations, as well as local and state policy makers and 
insurance organizations. I believe it is a sensible approach and I hope 
my colleagues will join me in this effort.
                                 ______