[Congressional Record Volume 152, Number 67 (Thursday, May 25, 2006)]
[Senate]
[Pages S5236-S5237]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. NELSON of Florida:
  S. 3116. 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.

                                S. 3116

       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
       ``(ii) the lesser of--

       ``(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
       ``(ii) the lesser of--

       ``(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:

The reference period
  shall be--in--
The 3 preceding taxable years. ........................................
The 2 preceding taxable years. ........................................
The preceding taxable year. ...........................................
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).
       ``(8) Qualified losses.--
       ``(A) In general.--The term `qualified losses' means, with 
     respect to a taxable year--

[[Page S5237]]

       ``(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).
       ``(IV) Fire.
       ``(V) Tsunami.
       ``(VI) Flood.
       ``(VII) Volcanic eruption.
       ``(VIII) Hail.

       ``(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.

       ``(9) Fund cap.--
       ``(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:
      Fire...................................................... 0.25  
      Allied.................................................... 1.25  
      Farmowners Multiple Peril................................. 0.25  
      Homeowners Multiple Peril................................. 0.75  
      Commercial Multi Peril (non-liability portion)............ 0.50  
      Earthquake................................................13.00  
      Inland Marine............................................ 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:

------------------------------------------------------------------------
                                                              Phase-in
                                                           percentage to
                                                           be applied to
                                                              fund cap
               ``Taxable year beginning in:                   computed
                                                               under
                                                           subparagraphs
                                                            (A) and (B):
------------------------------------------------------------------------
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
------------------------------------------------------------------------

       ``(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.
                                 ______