II

106TH CONGRESS

1ST SESSION S. 1914

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

NOVEMBER 10, 1999

Mr. MACK (for himself and Mrs. HUTCHISON) 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 1999’’.

6 SEC. 2. FINDINGS.

7 Congress makes the following findings:
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1 (1) Rising costs resulting from major natural

2 disasters are placing an increasing strain on the

3 ability of property and casualty insurance companies

4 to assure payment of homeowners’ claims and other

5 insurance claims arising from major natural disas6 ters now and 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 con-
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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 insurance

15 company taxable income) is amended by striking ‘‘and’’

16 at the end of paragraph (12), by striking the period at

17 the end of paragraph (13) and inserting ‘‘; and’’, and by

18 adding at the end the following:

19 ‘‘(14) the qualified contributions to a policy20 holder disaster protection fund during the taxable

21 year.’’

22 (b) DISTRIBUTIONS FROM POLICYHOLDER DISASTER

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

24 the Internal Revenue Code of 1986 is amended by striking

25 ‘‘and’’ at the end of subparagraph (D), by striking the
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1 period at the end of subparagraph (E) and inserting ‘‘,

2 and’’, and by adding at the end the following:

3 ‘‘(F) the fair market value of any distribu4 tions from a policyholder disaster protection

5 fund during the taxable year.’’

6 (c) DEFINITIONS AND OTHER RULES RELATING TO

7 POLICYHOLDER DISASTER PROTECTION FUNDS.—Section

8 832 of the Internal Revenue Code of 1986 is amended by

9 adding at the end the following:

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

11 POLICYHOLDER DISASTER PROTECTION FUNDS.—For

12 purposes of subsections (b)(1)(F) and (c)(14)—

13 ‘‘(1) POLICYHOLDER DISASTER PROTECTION

14 FUND.—The term ‘policyholder disaster protection

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

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

17 other arrangement or account—

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

19 that are set aside solely for the payment of

20 qualified losses, and

21 ‘‘(B) under the terms of which—

22 ‘‘(i) the assets in the fund are re23 quired to be invested in a manner con24 sistent with the investment requirements

25 applicable to the qualified insurance com-
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1 pany under the laws of its jurisdiction of

2 domicile,

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

4 year derived from the assets in the fund is

5 required to be distributed to the qualified

6 insurance company not less frequently

7 than annually,

8 ‘‘(iii) an excess balance drawdown

9 amount is required to be distributed to the

10 qualified insurance company not later than

11 the last day of the taxable year following

12 the taxable year for which such amount is

13 determined,

14 ‘‘(iv) a catastrophe drawdown amount

15 may be distributed to the qualified insur16 ance company if distributed not later than

17 the last day of the taxable year following

18 the taxable year for which such amount is

19 determined,

20 ‘‘(v) a State-required drawdown

21 amount may be distributed, and

22 ‘‘(vi) no distributions from the fund

23 are required or permitted other than the

24 distributions described in clauses (ii)

25 through (v).
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1 ‘‘(2) QUALIFIED INSURANCE COMPANY.—The

2 term ‘qualified insurance company’ means any insur3 ance company subject to tax under section 831(a).

4 ‘‘(3) QUALIFIED CONTRIBUTION.—

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

6 contribution’ means a contribution to a fund for

7 a taxable year to the extent that the amount of

8 such contribution, when added to the amount of

9 any other contributions to the fund for such

10 taxable year, does not exceed the excess of—

11 ‘‘(i) the fund cap for the taxable year,

12 over

13 ‘‘(ii) the fund balance determined as

14 of the close of the preceding taxable year.

15 ‘‘(B) CARRYOVER OF EXCESS CONTRIBU16 TIONS.—The amount of contributions to a fund

17 in excess of the amount of qualified contribu18 tions for a taxable year shall be treated as an

19 amount contributed to the fund for the fol20 lowing taxable year.

21 ‘‘(4) EXCESS BALANCE DRAWDOWN

22 AMOUNTS.—The term ‘excess balance drawdown

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

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

25 the taxable year, over
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1 ‘‘(B) the fund cap for the following taxable

2 year.

3 ‘‘(5) CATASTROPHE DRAWDOWN AMOUNTS.—

4 ‘‘(A) IN GENERAL.—Except as otherwise

5 provided in this paragraph, the term ‘catas6 trophe drawdown amount’ means an amount

7 that does not exceed the lesser of the amount

8 determined under subparagraph (B) or (C).

9 ‘‘(B) NET LOSSES FROM QUALIFYING

10 EVENTS.—The amount determined under this

11 subparagraph shall be equal to the qualified

12 losses for the taxable year determined without

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

14 ‘‘(C) GROSS LOSSES IN EXCESS OF

15 THRESHOLD.—The amount determined under

16 this subparagraph shall be equal to the excess

17 (if any) of—

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

19 year, over

20 ‘‘(ii) the lesser of—

21 ‘‘(I) the fund cap for the taxable

22 year (determined without regard to

23 paragraph (9)(E)), or

24 ‘‘(II) 30 percent of the qualified

25 insurance company’s surplus as re-
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1 gards policyholders as shown on the

2 company’s annual statement for the

3 calendar year preceding the taxable

4 year.

5 ‘‘(D) SPECIAL DRAWDOWN AMOUNT FOL6 LOWING A RECENT CATASTROPHE LOSS

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

8 reference period the qualified losses exceed the

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

10 the ‘catastrophe drawdown amount’ shall be an

11 amount that does not exceed the lesser of the

12 amount determined under subparagraph (B) or

13 the amount determined under this subpara14 graph. The amount determined under this sub15 paragraph shall be an amount equal to the ex16 cess (if any) of—

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

18 year, over

19 ‘‘(ii) the lesser of—

‘‘(I) 1 20 ⁄3 of the fund cap for the

21 taxable year (determined without re22 gard to paragraph (9)(E)), or

23 ‘‘(II) 10 percent of the qualified

24 insurance company’s surplus as re25 gards policyholders as shown on the
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1 company’s annual statement for the

2 calendar year preceding the taxable

3 year.

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

5 of subparagraph (D), the reference period shall

6 be determined under the following table:

‘‘For taxable years beginning

in:

The reference period shall be:

2003 and later ............................... The 3 preceding taxable years.

2002 ............................................... The 2 preceding taxable years.

2001 ............................................... The preceding taxable year.

2000 or before ............................... No reference period applies.

7 ‘‘(F) MINIMUM CATASTROPHE DRAWDOWN

8 AMOUNT FOR SUBSEQUENT DEVELOPMENT OF

9 GROSS LOSSES FROM PRIOR EVENTS.—Notwith10 standing any other provision of this paragraph,

11 the ‘catastrophe drawdown amount’ determined

12 for the taxable year shall not be less than the

13 amount described in this subparagraph. The

14 amount described in this subparagraph includes

15 qualified losses for the taxable year attributable

16 to any qualifying event if, in a prior taxable

17 year—

18 ‘‘(i) qualified losses attributable to

19 such qualifying event were incurred, and

20 ‘‘(ii) qualified losses for such taxable

21 year attributable to all qualifying events

22 exceeded the amount determined under
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1 subparagraph (C)(ii) (or, if applicable, the

2 amount determined under subparagraph

3 (D)(ii)) for such taxable year.

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

5 The term ‘State required drawdown amount’ means

6 any amount that the department of insurance for

7 the qualified insurance company’s jurisdiction of

8 domicile requires to be distributed from the fund, to

9 the extent such amount is not otherwise described in

10 paragraph (4) or (5).

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

12 means—

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

14 to the fund,

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

16 fund for any taxable year or years, and

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

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

19 ‘‘(8) QUALIFIED LOSSES.—

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

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

22 ‘‘(i) the amount of losses and loss ad23 justment expenses incurred in the qualified

24 lines of business specified in paragraph

25 (9), as reported in the qualified insurance
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1 company’s annual statement for the tax2 able year, that are attributable to 1 or

3 more qualifying events (regardless of when

4 such qualifying events occurred), plus

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

6 and loss adjustment expenses attributable

7 to such qualifying events have been re8 duced for reinsurance, plus

9 ‘‘(iii) any nonrecoverable assessments,

10 surcharges, or other liabilities that are

11 borne by the qualified insurance company

12 and are attributable to such qualifying

13 events.

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

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

16 means any event that satisfies clauses (i) and

17 (ii).

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

19 clause if the event is 1 or more of the fol20 lowing:

21 ‘‘(I) Windstorm (including hurri22 cane, cyclone, or tornado).

23 ‘‘(II) Earthquake (including any

24 fire following).
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1 ‘‘(III) Winter catastrophe (snow,

2 ice, or freezing).

3 ‘‘(IV) Fire.

4 ‘‘(V) Tsunami.

5 ‘‘(VI) Flood.

6 ‘‘(VII) Volcanic eruption.

7 ‘‘(VIII) Hail.

8 ‘‘(ii) CATASTROPHE DESIGNATION.—

9 An event satisfies this clause if the event—

10 ‘‘(I) is designated a catastrophe

11 by Property Claim Services or its suc12 cessor organization,

13 ‘‘(II) is declared by the President

14 to be an emergency or disaster, or

15 ‘‘(III) is declared to be an emer16 gency or disaster in a similar declara17 tion by the chief executive official of a

18 State, possession, or territory of the

19 United States, or the District of Co20 lumbia.

21 ‘‘(9) FUND CAP.—

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

23 for a taxable year is the sum of the separate

24 lines of business caps for each of the qualified

25 lines of business specified in the table contained
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1 in subparagraph (C) (as modified under sub2 paragraphs (D) and (E)).

3 ‘‘(B) SEPARATE LINES OF BUSINESS

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

5 separate lines of business cap, with respect to

6 a qualified line of business specified in the table

7 contained in subparagraph (C), is the product

8 of—

9 ‘‘(i) net written premiums reported in

10 the annual statement for the calendar year

11 preceding the taxable year in such line of

12 business, multiplied by

13 ‘‘(ii) the fund cap multiplier applica14 ble to such qualified line of business.

15 ‘‘(C) QUALIFIED LINES OF BUSINESS AND

16 THEIR RESPECTIVE FUND CAP MULTIPLIERS.—

17 For purposes of this paragraph, the qualified

18 lines of business and fund cap multipliers speci19 fied in this subparagraph are those specified in

20 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 Multiple Peril (non-liability portion) .................... 0.50

Earthquake .............................................................................. 13.00

Inland Marine .......................................................................... 0.25

Private Passenger Auto Physical Damage .............................. 0.01

Commercial Auto Physical Damage ......................................... 0.01.
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1 ‘‘(D) SUBSEQUENT MODIFICATIONS OF

2 THE ANNUAL STATEMENT BLANK.—If, with re3 spect to any taxable year beginning after the ef4 fective date of this subsection, the annual state5 ment blank required to be filed is amended to

6 replace, combine, or otherwise modify any of

7 the qualified lines of business specified in sub8 paragraph (C), then for such subsequent tax9 able year subparagraph (C) shall be applied in

10 a manner such that the fund cap shall be the

11 same amount as if such reporting modification

12 had not been made.

13 ‘‘(E) 20-YEAR PHASE-IN.—Notwith14 standing subparagraph (C), the fund cap for a

15 taxable year shall be the amount determined

16 under subparagraph (C), as adjusted pursuant

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

18 by the phase-in percentage indicated in the fol19 lowing table:

Phase-in percentage to be

‘‘Taxable year applied to fund cap computed

beginning in: under subparagraphs (A) and

(B):

2001 ............................................... 5 percent

2002 ............................................... 10 percent

2003 ............................................... 15 percent

2004 ............................................... 20 percent

2005 ............................................... 25 percent

2006 ............................................... 30 percent

2007 ............................................... 35 percent

2008 ............................................... 40 percent

2009 ............................................... 45 percent

2010 ............................................... 50 percent
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Phase-in percentage to be

‘‘Taxable year applied to fund cap computed

beginning in: under subparagraphs (A) and

(B):

2011 ............................................... 55 percent

2012 ............................................... 60 percent

2013 ............................................... 65 percent

2014 ............................................... 70 percent

2015 ............................................... 75 percent

2016 ............................................... 80 percent

2017 ............................................... 85 percent

2018 ............................................... 90 percent

2019 ............................................... 95 percent

2020 or thereafter ......................... 100 percent.

1 ‘‘(10) TREATMENT OF INVESTMENT INCOME

2 AND GAIN OR LOSS.—

3 ‘‘(A) CONTRIBUTIONS IN KIND.—The

4 qualified insurance company’s contribution of

5 property other than money to a fund shall be

6 treated as a sale or exchange of such property

7 for an amount equal to its fair market value as

8 of the date of the contribution and appropriate

9 adjustment shall be made to the basis of such

10 property. Section 267 shall apply to any loss re11 alized upon such contribution as if the fund

12 were a trust and the qualified insurance com13 pany were the grantor of such trust.

14 ‘‘(B) DISTRIBUTIONS IN KIND.—A dis15 tribution of property other than money by a

16 fund to the qualified insurance company shall

17 not be treated as a sale or exchange or other

18 disposition of such property. In the case of such

19 a distribution, the basis of such property imme-
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1 diately after the distribution shall be equal to

2 its fair market value on the date of distribution.

3 ‘‘(C) INCOME WITH RESPECT TO FUND AS4 SETS.—Items of income of the type described in

5 paragraphs (1)(B), (1)(C), and (2) of sub6 section (b) that are derived from the assets held

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

8 other disposition of such assets, shall be consid9 ered items of income, gain, or loss of the quali10 fied insurance company. Notwithstanding para11 graph (1)(F) of subsection (b), distributions of

12 net income to the qualified insurance company

13 pursuant to paragraph (1)(B)(ii) of this sub14 section shall not cause such income to be taken

15 into account a second time.

16 ‘‘(D) NET INVESTMENT LOSSES DIS17 ALLOWED.—Losses described in the first sen18 tence of subparagraph (C) shall not be allowed

19 to the qualified insurance company to the ex20 tent the amount of such losses for the taxable

21 year exceeds the amount of income for the tax22 able year described in the first sentence of sub23 paragraph (C).

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

25 For purposes of paragraph (1)(B)(ii), the net in-
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1 come derived from the assets in the fund for the tax2 able year shall be the items of income and gain for

3 the taxable year, less the items of loss for the tax4 able year, derived from such assets, as described in

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

6 there is a net investment loss for the taxable year

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

8 preceding sentence (determined without regard to

9 paragraph (10)(D)) exceed the items of income and

10 gain described in the preceding sentence.

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

12 this subsection, the term ‘annual statement’ shall

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

14 ‘‘(13) EXCLUSION OF PREMIUMS AND LOSSES

15 ON CERTAIN PUERTO RICAN RISKS.—Notwith16 standing any other provision of this subsection, pre17 miums and losses with respect to risks covered by a

18 catastrophe reserve established under the laws or

19 regulations of the Commonwealth of Puerto Rico

20 shall not be taken into account under this subsection

21 in determining the amount of the fund cap or the

22 amount of qualified losses.

23 ‘‘(14) TREATMENT OF FUND IN CERTAIN MERG24 ERS AND ACQUISITIONS.—
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1 ‘‘(A) REORGANIZATIONS, ETC.—A fund

2 shall be treated as an item described in section

3 381(c)(22) for purposes of any transaction of

4 the qualified insurance company to which sec5 tion 381 applies.

6 ‘‘(B) STOCK PURCHASE TREATED AS

7 ASSET ACQUISITION.—In any case where the

8 qualified insurance company undergoes a

9 deemed sale of its assets under section 338—

10 ‘‘(i) gain or loss upon the deemed sale

11 of the assets held in the fund shall be

12 taken into account for purposes of the dis13 tribution of net income required under

14 paragraph (1)(B)(ii);

15 ‘‘(ii) immediately prior to the close of

16 the acquisition date, the qualified insur17 ance company shall include in its gross in18 come an amount equal to the excess (if

19 any) of—

20 ‘‘(I) the sum of all qualified con21 tributions to the fund, over

22 ‘‘(II) the sum of all distributions

23 under clauses (iii) through (v) of

24 paragraph (1)(B);
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1 ‘‘(iii) the fund shall be treated as a

2 fund of the new corporation (within the

3 meaning of section 338(a)(2)) established

4 on the first day after the acquisition date,

5 and such new corporation shall be treated

6 as contributing to the fund on such date

7 an amount equal to the amount described

8 in clause (ii); and

9 ‘‘(iv) if the acquisition date is not De10 cember 31, the fund cap for the first tax11 able year beginning after the acquisition

12 date shall be determined by reference to

13 the annual statement of the qualified in14 surance company for the calendar year

15 preceding the calendar year that includes

16 the acquisition date.

17 ‘‘(15) REGULATIONS.—The Secretary shall pre18 scribe such regulations as may be necessary or ap19 propriate to carry out the purposes of this sub20 section, including regulations—

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

22 subsection to a qualified insurance company

23 having a taxable year other than the calendar

24 year or a taxable year less than 12 months,
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1 ‘‘(B) which govern a fund maintained by

2 an insurance company that ceases to be subject

3 to this part, and

4 ‘‘(C) which govern the application of para5 graph (9)(D).’’

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

7 this section shall apply to taxable years beginning after

8 December 31, 2000.

9 SEC. 4. PENALTY TAX ON CERTAIN DRAWDOWNS.

10 (a) EXCESS BALANCE DRAWDOWNS ATTRIBUTABLE

11 TO REINSURANCE WITH RELATED PARTIES.—Part II of

12 subchapter L of chapter 1 of the Internal Revenue Code

13 of 1986 (relating to the taxation of insurance companies

14 other than life insurance companies) is amended by adding

15 at the end the following:

16 ‘‘SEC. 836. PENALTY TAX ON CERTAIN DRAWDOWNS FROM

17 POLICYHOLDER DISASTER PROTECTION

18 FUNDS.

19 ‘‘(a) PENALTY TAX.—The tax imposed by section

20 831(a) for any taxable year shall be an amount equal to

21 the tax (if any) otherwise imposed by that section (deter22 mined without regard to this section), plus an amount

23 equal to 65 percent of any penalty drawdown from a pol24 icyholder disaster protection fund.
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1 ‘‘(b) PENALTY DRAWDOWN.—For purposes of sub2 section (a), the term ‘penalty drawdown’ means that por3 tion of any excess balance drawdown amount (as defined

4 in section 832(h)(1)(B)(iii)) received for the taxable year

5 which is attributable to reinsurance ceded by a qualified

6 insurance company (as defined in section 832(h)(2), and

7 hereafter in this section referred to as the ‘ceding com8 pany’) to 1 or more other qualified insurance companies

9 (hereafter in this section referred to as the ‘reinsurer’ or

10 ‘reinsurers’) which are members of the same controlled

11 group of corporations (as defined in section 1563(a)) as

12 the ceding company.

13 ‘‘(c) REDUCTION OF PENALTY DRAWDOWN

14 AMOUNT.—For purposes of this section, the amount of

15 any penalty drawdown determined under subsection (b)

16 shall be reduced by the sum of the amounts determined

17 under this subsection for each reinsurer described in sub18 section (b). For each such reinsurer, the amount deter19 mined under this subsection shall be equal to the lesser

20 of—

21 ‘‘(1) the reinsurer’s contributions to a policy22 holder disaster protection fund for the taxable year,

23 or

24 ‘‘(2) the portion of the reinsurer’s fund cap for

25 the taxable year (within the meaning of section
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1 832(h)(9)) that is attributable to the reinsurance de2 scribed in subsection (a).’’

3 (b) CONFORMING AMENDMENTS.—

4 (1) Section 831(c) of the Internal Revenue

5 Code of 1986 is amended by adding at the end the

6 following:

7 ‘‘(4) For penalty tax on certain drawdowns

8 from policyholder disaster protection funds, see sec9 tion 836.’’

10 (2) The table of sections for part II of sub11 chapter L of chapter 1 of such Code is amended by

12 adding at the end the following:

‘‘Sec. 836. Penalty tax on certain drawdowns from policyholder

disaster protection funds.’’

13 (c) EFFECTIVE DATE.—The amendments made by

14 this section shall apply to taxable years beginning after

15 December 31, 2000.

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