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[Congressional Bills 106th Congress]
[From the U.S. Government Publishing Office]
[S. 1914 Introduced in Senate (IS)]

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.

    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 1999''.

SEC. 2. FINDINGS.

    Congress makes the following findings:
            (1) Rising costs resulting from major 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 insurance company taxable income) 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:
            ``(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 the Internal Revenue Code of 1986 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:
                    ``(F) the fair market value of any distributions 
                from a policyholder disaster protection fund during the 
                taxable year.''
    (c) Definitions and Other Rules Relating to Policyholder Disaster 
Protection Funds.--Section 832 of the Internal Revenue Code of 1986 is 
amended by adding at the end the following:
    ``(h) Definitions and Other Rules Relating to Policyholder Disaster 
Protection Funds.--For purposes of subsections (b)(1)(F) and (c)(14)--
            ``(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 to the qualified insurance 
                        company not less frequently than annually,
                            ``(iii) an excess balance drawdown amount 
                        is required to be distributed to the qualified 
                        insurance company not later than the last day 
                        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 not later than the last day of 
                        the taxable year following the taxable 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).
            ``(2) Qualified insurance company.--The term `qualified 
        insurance company' means any insurance company subject to tax 
        under section 831(a).
            ``(3) Qualified contribution.--
                    ``(A) In general.--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 amount of any other 
                contributions to the fund for such taxable year, does 
                not exceed the excess of--
                            ``(i) the fund cap for the taxable year, 
                        over
                            ``(ii) the fund balance determined as of 
                        the close of the preceding taxable year.
                    ``(B) Carryover of excess contributions.--The 
                amount of contributions to a fund in excess of the 
                amount of qualified contributions for a taxable year 
                shall be treated as an amount contributed to the fund 
                for the following 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 amounts.--
                    ``(A) In general.--Except as otherwise provided in 
                this paragraph, 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:

``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.
                    ``(F) Minimum catastrophe drawdown amount for 
                subsequent development of gross losses from prior 
                events.--Notwithstanding any other provision of this 
                paragraph, the `catastrophe drawdown amount' determined 
                for the taxable year shall not be less than the amount 
                described in this subparagraph. The amount described in 
                this subparagraph includes qualified losses for the 
                taxable year attributable to any qualifying event if, 
                in a prior taxable year--
                            ``(i) qualified losses attributable to such 
                        qualifying event were incurred, and
                            ``(ii) qualified losses for such taxable 
                        year attributable to all qualifying events 
                        exceeded the amount determined under 
                        subparagraph (C)(ii) (or, if applicable, the 
                        amount determined under subparagraph (D)(ii)) 
                        for such taxable year.
            ``(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--
                            ``(i) the amount of losses and loss 
                        adjustment expenses incurred in the qualified 
                        lines of business specified in paragraph (9), 
                        as reported in the qualified 
insurance company's annual statement for the taxable year, that are 
attributable to 1 or more qualifying events (regardless of when such 
qualifying events occurred), plus
                            ``(ii) the amount by which such losses and 
                        loss adjustment expenses attributable to such 
                        qualifying events have been reduced for 
                        reinsurance, 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 (including 
                                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 Multiple Peril (non-liability                      0.50 
        portion).
    Earthquake....................................               13.00 
    Inland Marine.................................                0.25 
    Private Passenger Auto Physical Damage........                0.01 
    Commercial Auto Physical Damage...............                0.01.
                    ``(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 subsequent 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
``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
    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.
            ``(10) Treatment of investment income and gain or loss.--
                    ``(A) Contributions in kind.--The qualified 
                insurance company's contribution 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 the contribution and 
                appropriate adjustment shall be made to the basis of 
                such property. Section 267 shall apply to any loss 
                realized upon such contribution as if the fund were a 
                trust and the qualified insurance company were the 
                grantor of such trust.
                    ``(B) Distributions in kind.--A distribution 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. In the 
                case of such a distribution, the basis of such property 
                immediately after the distribution shall be equal to 
                its fair market value on the date of distribution.
                    ``(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.
                    ``(D) Net investment losses disallowed.--Losses 
                described in the first sentence of subparagraph (C) 
                shall not be allowed to the qualified insurance company 
                to the extent the amount of such losses for the taxable 
                year exceeds the amount of income for the taxable year 
                described in the first sentence of subparagraph (C).
            ``(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 (determined 
        without regard to paragraph (10)(D)) 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)  Treatment of fund in certain mergers and 
        acquisitions.--
                    ``(A) Reorganizations, etc.--A fund shall be 
                treated as an item described in section 381(c)(22) for 
                purposes of any transaction of the qualified insurance 
                company to which section 381 applies.
                    ``(B) Stock purchase treated as asset 
                acquisition.--In any case where the qualified insurance 
                company undergoes a deemed sale of its assets under 
                section 338--
                            ``(i) gain or loss upon the deemed sale of 
                        the assets held in the fund shall be taken into 
                        account for purposes of the distribution of net 
                        income required under paragraph (1)(B)(ii);
                            ``(ii) immediately prior to the close of 
                        the acquisition date, the qualified insurance 
                        company shall include in its gross income an 
                        amount equal to the excess (if any) of--
                                    ``(I) the sum of all qualified 
                                contributions to the fund, over
                                    ``(II) the sum of all distributions 
                                under clauses (iii) through (v) of 
                                paragraph (1)(B);
                            ``(iii) the fund shall be treated as a fund 
                        of the new corporation (within the meaning of 
                        section 338(a)(2)) established on the first day 
                        after the acquisition date, and such new 
                        corporation shall be treated as contributing to 
                        the fund on such date an amount equal to the 
                        amount described in clause (ii); and
                            ``(iv) if the acquisition date is not 
                        December 31, the fund cap for the first taxable 
                        year beginning after the acquisition date shall 
                        be determined by reference to the annual 
                        statement of the qualified insurance company 
                        for the calendar year preceding the calendar 
                        year that includes the acquisition date.
            ``(15) 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 an 
                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, 2000.

SEC. 4. PENALTY TAX ON CERTAIN DRAWDOWNS.

    (a) Excess Balance Drawdowns Attributable to Reinsurance With 
Related Parties.--Part II of subchapter L of chapter 1 of the Internal 
Revenue Code of 1986 (relating to the taxation of insurance companies 
other than life insurance companies) is amended by adding at the end 
the following:

``SEC. 836. PENALTY TAX ON CERTAIN DRAWDOWNS FROM POLICYHOLDER DISASTER 
              PROTECTION FUNDS.

    ``(a) Penalty Tax.--The tax imposed by section 831(a) for any 
taxable year shall be an amount equal to the tax (if any) otherwise 
imposed by that section (determined without regard to this section), 
plus an amount equal to 65 percent of any penalty drawdown from a 
policyholder disaster protection fund.
    ``(b) Penalty Drawdown.--For purposes of subsection (a), the term 
`penalty drawdown' means that portion of any excess balance drawdown 
amount (as defined in section 832(h)(1)(B)(iii)) received for the 
taxable year which is attributable to reinsurance ceded by a qualified 
insurance company (as defined in section 832(h)(2), and hereafter in 
this section referred to as the `ceding company') to 1 or more other 
qualified insurance companies (hereafter in this section referred to as 
the `reinsurer' or `reinsurers') which are members of the same 
controlled group of corporations (as defined in section 1563(a)) as the 
ceding company.
    ``(c) Reduction of Penalty Drawdown Amount.--For purposes of this 
section, the amount of any penalty drawdown determined under subsection 
(b) shall be reduced by the sum of the amounts determined under this 
subsection for each reinsurer described in subsection (b). For each 
such reinsurer, the amount determined under this subsection shall be 
equal to the lesser of--
            ``(1) the reinsurer's contributions to a policyholder 
        disaster protection fund for the taxable year, or
            ``(2) the portion of the reinsurer's fund cap for the 
        taxable year (within the meaning of section 832(h)(9)) that is 
        attributable to the reinsurance described in subsection (a).''
    (b) Conforming Amendments.--
            (1) Section 831(c) of the Internal Revenue Code of 1986 is 
        amended by adding at the end the following:
            ``(4) For penalty tax on certain drawdowns from 
        policyholder disaster protection funds, see section 836.''
            (2) The table of sections for part II of subchapter L of 
        chapter 1 of such Code is amended by adding at the end the 
        following:

                              ``Sec. 836. Penalty tax on certain 
                                        drawdowns from policyholder 
                                        disaster protection funds.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2000.
                                 <all>
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