II 

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. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Policyholder Disaster 

5 Protection Act of 2006’’. 

6 SEC. 2. FINDINGS. 

7 The Congress makes the following findings: 


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1 (1) Rising costs resulting from natural disasters 

2 are placing an increasing strain on the ability of 

3 property and casualty insurance companies to assure 

4 payment of homeowners’ claims and other insurance 

5 claims arising from major natural disasters now and 

6 in the future. 

7 (2) Present tax laws do not provide adequate 

8 incentives to assure that natural disaster insurance 

9 is provided or, where such insurance is provided, 

10 that funds are available for payment of insurance 

11 claims in the event of future catastrophic losses from 

12 major natural disasters, as present law requires an 

13 insurer wishing to accumulate surplus assets for this 

14 purpose to do so entirely from its after-tax retained 

15 earnings. 

16 (3) Revising the tax laws applicable to the prop17 erty and casualty insurance industry to permit care18 fully controlled accumulation of pretax dollars in 

19 separate reserve funds devoted solely to the payment 

20 of claims arising from future major natural disasters 

21 will provide incentives for property and casualty in22 surers to make natural disaster insurance available, 

23 will give greater protection to the Nation’s home24 owners, small businesses, and other insurance conVerDate Aug 31 2005 18:46 Jun 03, 2006 Jkt 049200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\S3116.IS S3116

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1 sumers, and will help assure the future financial 

2 health of the Nation’s insurance system as a whole. 

3 (4) Implementing these changes will reduce the 

4 possibility that a significant portion of the private 

5 insurance system would fail in the wake of a major 

6 natural disaster and that governmental entities 

7 would be required to step in to provide relief at tax8 payer expense. 

9 SEC. 3. CREATION OF POLICYHOLDER DISASTER PROTEC10 TION FUNDS; CONTRIBUTIONS TO AND DIS11 TRIBUTIONS FROM FUNDS; OTHER RULES. 

12 (a) CONTRIBUTIONS TO POLICYHOLDER DISASTER

13 PROTECTION FUNDS.—Subsection (c) of section 832 of 

14 the Internal Revenue Code of 1986 (relating to the taxable 

15 income of insurance companies other than life insurance 

16 companies) is amended by striking ‘‘and’’ at the end of 

17 paragraph (12), by striking the period at the end of para18 graph (13) and inserting ‘‘; and’’, and by adding at the 

19 end the following new paragraph: 

20 ‘‘(14) the qualified contributions to a policy21 holder disaster protection fund during the taxable 

22 year.’’. 

23 (b) DISTRIBUTIONS FROM POLICYHOLDER DISASTER

24 PROTECTION FUNDS.—Paragraph (1) of section 832(b) of 

25 such Code is amended by striking ‘‘and’’ at the end of 


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1 subparagraph (D), by striking the period at the end of 

2 subparagraph (E) and inserting ‘‘, and’’, and by adding 

3 at the end the following new subparagraph: 

4 ‘‘(F) the amount of any distributions from 

5 a policyholder disaster protection fund during 

6 the taxable year, except that a distribution 

7 made to return to the qualified insurance com8 pany any contribution which is not a qualified 

9 contribution (as defined in subsection (h)) for a 

10 taxable year shall not be included in gross in11 come if such distribution is made prior to the 

12 filing of the tax return for such taxable year.’’. 

13 (c) DEFINITIONS AND OTHER RULES RELATING TO

14 POLICYHOLDER DISASTER PROTECTION FUNDS.—Section 

15 832 of such Code (relating to insurance company taxable 

16 income) is amended by adding at the end the following 

17 new subsection: 

18 ‘‘(h) DEFINITIONS AND OTHER RULES RELATING TO

19 POLICYHOLDER DISASTER PROTECTION FUNDS.—For 

20 purposes of this section— 

21 ‘‘(1) POLICYHOLDER DISASTER PROTECTION

22 FUND.—The term ‘policyholder disaster protection 

23 fund’ (hereafter in this subsection referred to as the 

24 ‘fund’) means any custodial account, trust, or any 

25 other arrangement or account— 


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1 ‘‘(A) which is established to hold assets 

2 that are set aside solely for the payment of 

3 qualified losses, and 

4 ‘‘(B) under the terms of which— 

5 ‘‘(i) the assets in the fund are re6 quired to be invested in a manner con7 sistent with the investment requirements 

8 applicable to the qualified insurance com9 pany under the laws of its jurisdiction of 

10 domicile, 

11 ‘‘(ii) the net income for the taxable 

12 year derived from the assets in the fund is 

13 required to be distributed no less fre14 quently than annually, 

15 ‘‘(iii) an excess balance drawdown 

16 amount is required to be distributed to the 

17 qualified insurance company no later than 

18 the close of the taxable year following the 

19 taxable year for which such amount is de20 termined, 

21 ‘‘(iv) a catastrophe drawdown amount 

22 may be distributed to the qualified insur23 ance company if distributed prior to the 

24 close of the taxable year following the year 

25 for which such amount is determined, 


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1 ‘‘(v) a State required drawdown 

2 amount may be distributed, and 

3 ‘‘(vi) no distributions from the fund 

4 are required or permitted other than the 

5 distributions described in clauses (ii) 

6 through (v) and the return to the qualified 

7 insurance company of contributions that 

8 are not qualified contributions. 

9 ‘‘(2) QUALIFIED INSURANCE COMPANY.—The 

10 term ‘qualified insurance company’ means any insur11 ance company subject to tax under section 831(a). 

12 ‘‘(3) QUALIFIED CONTRIBUTION.—The term 

13 ‘qualified contribution’ means a contribution to a 

14 fund for a taxable year to the extent that the 

15 amount of such contribution, when added to the pre16 vious contributions to the fund for such taxable 

17 year, does not exceed the excess of— 

18 ‘‘(A) the fund cap for the taxable year, 

19 over 

20 ‘‘(B) the fund balance determined as of the 

21 close of the preceding taxable year. 

22 ‘‘(4) EXCESS BALANCE DRAWDOWN

23 AMOUNTS.—The term ‘excess balance drawdown 

24 amount’ means the excess (if any) of— 


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1 ‘‘(A) the fund balance as of the close of 

2 the taxable year, over 

3 ‘‘(B) the fund cap for the following taxable 

4 year. 

5 ‘‘(5) CATASTROPHE DRAWDOWN AMOUNT.— 

6 ‘‘(A) IN GENERAL.—The term ‘catastrophe 

7 drawdown amount’ means an amount that does 

8 not exceed the lesser of the amount determined 

9 under subparagraph (B) or (C). 

10 ‘‘(B) NET LOSSES FROM QUALIFYING

11 EVENTS.—The amount determined under this 

12 subparagraph shall be equal to the qualified 

13 losses for the taxable year determined without 

14 regard to clause (ii) of paragraph (8)(A). 

15 ‘‘(C) GROSS LOSSES IN EXCESS OF

16 THRESHOLD.—The amount determined under 

17 this subparagraph shall be equal to the excess 

18 (if any) of— 

19 ‘‘(i) the qualified losses for the taxable 

20 year, over 

21 ‘‘(ii) the lesser of— 

22 ‘‘(I) the fund cap for the taxable 

23 year (determined without regard to 

24 paragraph (9)(E)), or 


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1 ‘‘(II) 30 percent of the qualified 

2 insurance company’s surplus as re3 gards policyholders as shown on the 

4 company’s annual statement for the 

5 calendar year preceding the taxable 

6 year. 

7 ‘‘(D) SPECIAL DRAWDOWN AMOUNT FOL8 LOWING A RECENT CATASTROPHE LOSS

9 YEAR.—If for any taxable year included in the 

10 reference period the qualified losses exceed the 

11 amount determined under subparagraph (C)(ii), 

12 the ‘catastrophe drawdown amount’ shall be an 

13 amount that does not exceed the lesser of the 

14 amount determined under subparagraph (B) or 

15 the amount determined under this subpara16 graph. The amount determined under this sub17 paragraph shall be an amount equal to the ex18 cess (if any) of— 

19 ‘‘(i) the qualified losses for the taxable 

20 year, over 

21 ‘‘(ii) the lesser of— 

‘‘(I) 1 22 ⁄3 of the fund cap for the 

23 taxable year (determined without re24 gard to paragraph (9)(E)), or 


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1 ‘‘(II) 10 percent of the qualified 

2 insurance company’s surplus as re3 gards policyholders as shown on the 

4 company’s annual statement for the 

5 calendar year preceding the taxable 

6 year. 

7 ‘‘(E) REFERENCE PERIOD.—For purposes 

8 of subparagraph (D), the reference period shall 

9 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. 

10 ‘‘(6) STATE REQUIRED DRAWDOWN AMOUNT.— 

11 The term ‘State required drawdown amount’ means 

12 any amount that the department of insurance for 

13 the qualified insurance company’s jurisdiction of 

14 domicile requires to be distributed from the fund, to 

15 the extent such amount is not otherwise described in 

16 paragraph (4) or (5). 

17 ‘‘(7) FUND BALANCE.—The term ‘fund balance’ 

18 means— 

19 ‘‘(A) the sum of all qualified contributions 

20 to the fund, 

21 ‘‘(B) less any net investment loss of the 

22 fund for any taxable year or years, and 


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1 ‘‘(C) less the sum of all distributions under 

2 clauses (iii) through (v) of paragraph (1)(B). 

3 ‘‘(8) QUALIFIED LOSSES.— 

4 ‘‘(A) IN GENERAL.—The term ‘qualified 

5 losses’ means, with respect to a taxable year— 

6 ‘‘(i) the amount of losses and loss ad7 justment expenses incurred in the qualified 

8 lines of business specified in paragraph 

9 (9), net of reinsurance, as reported in the 

10 qualified insurance company’s annual 

11 statement for the taxable year, that are at12 tributable to one or more qualifying events 

13 (regardless of when such qualifying events 

14 occurred), 

15 ‘‘(ii) the amount by which such losses 

16 and loss adjustment expenses attributable 

17 to such qualifying events have been re18 duced for reinsurance received and recover19 able, plus 

20 ‘‘(iii) any nonrecoverable assessments, 

21 surcharges, or other liabilities that are 

22 borne by the qualified insurance company 

23 and are attributable to such qualifying 

24 events. 


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1 ‘‘(B) QUALIFYING EVENT.—For purposes 

2 of subparagraph (A), the term ‘qualifying event’ 

3 means any event that satisfies clauses (i) and 

4 (ii). 

5 ‘‘(i) EVENT.—An event satisfies this 

6 clause if the event is 1 or more of the fol7 lowing: 

8 ‘‘(I) Windstorm (hurricane, cy9 clone, or tornado). 

10 ‘‘(II) Earthquake (including any 

11 fire following). 

12 ‘‘(III) Winter catastrophe (snow, 

13 ice, or freezing). 

14 ‘‘(IV) Fire. 

15 ‘‘(V) Tsunami. 

16 ‘‘(VI) Flood. 

17 ‘‘(VII) Volcanic eruption. 

18 ‘‘(VIII) Hail. 

19 ‘‘(ii) CATASTROPHE DESIGNATION.— 

20 An event satisfies this clause if the event— 

21 ‘‘(I) is designated a catastrophe 

22 by Property Claim Services or its suc23 cessor organization, 

24 ‘‘(II) is declared by the President 

25 to be an emergency or disaster, or 


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1 ‘‘(III) is declared to be an emer2 gency or disaster in a similar declara3 tion by the chief executive official of a 

4 State, possession, or territory of the 

5 United States, or the District of Co6 lumbia. 

7 ‘‘(9) FUND CAP.— 

8 ‘‘(A) IN GENERAL.—The term ‘fund cap’ 

9 for a taxable year is the sum of the separate 

10 lines of business caps for each of the qualified 

11 lines of business specified in the table contained 

12 in subparagraph (C) (as modified under sub13 paragraphs (D) and (E)). 

14 ‘‘(B) SEPARATE LINES OF BUSINESS

15 CAP.—For purposes of subparagraph (A), the 

16 separate lines of business cap, with respect to 

17 a qualified line of business specified in the table 

18 contained in subparagraph (C), is the product 

19 of— 

20 ‘‘(i) net written premiums reported in 

21 the annual statement for the calendar year 

22 preceding the taxable year in such line of 

23 business, multiplied by 

24 ‘‘(ii) the fund cap multiplier applica25 ble to such qualified line of business. 


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1 ‘‘(C) QUALIFIED LINES OF BUSINESS AND

2 THEIR RESPECTIVE FUND CAP MULTIPLIERS.— 

3 For purposes of this paragraph, the qualified 

4 lines of business and fund cap multipliers speci5 fied in this subparagraph are those specified in 

6 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.

7 ‘‘(D) SUBSEQUENT MODIFICATIONS OF

8 THE ANNUAL STATEMENT BLANK.—If, with re9 spect to any taxable year beginning after the ef10 fective date of this subsection, the annual state11 ment blank required to be filed is amended to 

12 replace, combine, or otherwise modify any of 

13 the qualified lines of business specified in sub14 paragraph (C), then for such taxable year sub15 paragraph (C) shall be applied in a manner 

16 such that the fund cap shall be the same 

17 amount as if such reporting modification had 

18 not been made. 

19 ‘‘(E) 20-YEAR PHASE-IN.—Notwith20 standing subparagraph (C), the fund cap for a 

21 taxable year shall be the amount determined 


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1 under subparagraph (C), as adjusted pursuant 

2 to subparagraph (D) (if applicable), multiplied 

3 by the phase-in percentage indicated in the fol4 lowing table: 

‘‘Taxable year beginning in: 

Phase-in percentage to be 

applied to 

fund cap 

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 

5 ‘‘(10) TREATMENT OF INVESTMENT INCOME

6 AND GAIN OR LOSS.— 

7 ‘‘(A) CONTRIBUTIONS IN KIND.—A trans8 fer of property other than money to a fund 

9 shall be treated as a sale or exchange of such 

10 property for an amount equal to its fair market 

11 value as of the date of transfer, and appro12 priate adjustment shall be made to the basis of 


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1 such property. Section 267 shall apply to any 

2 loss realized upon such a transfer. 

3 ‘‘(B) DISTRIBUTIONS IN KIND.—A transfer 

4 of property other than money by a fund to the 

5 qualified insurance company shall not be treat6 ed as a sale or exchange or other disposition of 

7 such property. The basis of such property im8 mediately after such transfer shall be the great9 er of the basis of such property immediately be10 fore such transfer or the fair market value of 

11 such property on the date of such transfer. 

12 ‘‘(C) INCOME WITH RESPECT TO FUND AS13 SETS.—Items of income of the type described in 

14 paragraphs (1)(B), (1)(C), and (2) of sub15 section (b) that are derived from the assets held 

16 in a fund, as well as losses from the sale or 

17 other disposition of such assets, shall be consid18 ered items of income, gain, or loss of the quali19 fied insurance company. Notwithstanding para20 graph (1)(F) of subsection (b), distributions of 

21 net income to the qualified insurance company 

22 pursuant to paragraph (1)(B)(ii) of this sub23 section shall not cause such income to be taken 

24 into account a second time. 


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1 ‘‘(11) NET INCOME; NET INVESTMENT LOSS.— 

2 For purposes of paragraph (1)(B)(ii), the net in3 come derived from the assets in the fund for the tax4 able year shall be the items of income and gain for 

5 the taxable year, less the items of loss for the tax6 able year, derived from such assets, as described in 

7 paragraph (10)(C). For purposes of paragraph (7), 

8 there is a net investment loss for the taxable year 

9 to the extent that the items of loss described in the 

10 preceding sentence exceed the items of income and 

11 gain described in the preceding sentence. 

12 ‘‘(12) ANNUAL STATEMENT.—For purposes of 

13 this subsection, the term ‘annual statement’ shall 

14 have the meaning set forth in section 846(f)(3). 

15 ‘‘(13) EXCLUSION OF PREMIUMS AND LOSSES

16 ON CERTAIN PUERTO RICAN RISKS.—Notwith17 standing any other provision of this subsection, pre18 miums and losses with respect to risks covered by a 

19 catastrophe reserve established under the laws or 

20 regulations of the Commonwealth of Puerto Rico 

21 shall not be taken into account under this subsection 

22 in determining the amount of the fund cap or the 

23 amount of qualified losses. 

24 ‘‘(14) REGULATIONS.—The Secretary shall pre25 scribe such regulations as may be necessary or apVerDate Aug 31 2005 18:46 Jun 03, 2006 Jkt 049200 PO 00000 Frm 00016 Fmt 6652 Sfmt 6201 E:\BILLS\S3116.IS S3116

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1 propriate to carry out the purposes of this sub2 section, including regulations— 

3 ‘‘(A) which govern the application of this 

4 subsection to a qualified insurance company 

5 having a taxable year other than the calendar 

6 year or a taxable year less than 12 months, 

7 ‘‘(B) which govern a fund maintained by a 

8 qualified insurance company that ceases to be 

9 subject to this part, and 

10 ‘‘(C) which govern the application of para11 graph (9)(D).’’. 

12 (d) EFFECTIVE DATE.—The amendments made by 

13 this section shall apply to taxable years beginning after 

14 December 31, 2005. 

Æ 


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