		II
		109th CONGRESS
		2d Session
		S. 3116
		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.Short titleThis Act may be cited as the
			 Policyholder Disaster Protection Act
			 of 2006.
		2.FindingsThe 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.
			3.Creation of
			 policyholder disaster protection funds; contributions to and distributions from
			 funds; other rules
			(a)Contributions to
			 policyholder disaster protection fundsSubsection (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 fundsParagraph (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 fundsSection 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 fundsFor purposes of this section—
						(1)Policyholder
				disaster protection fundThe
				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 companyThe term
				qualified insurance company means any insurance company subject to
				tax under section 831(a).
						(3)Qualified
				contributionThe 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 amountsThe 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
				generalThe 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 eventsThe 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 thresholdThe
				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 yearIf 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
				periodFor purposes of
				subparagraph (D), the reference period shall be determined under the following
				table:

											For a taxable yearThe reference period

											 beginning in— shall be—

											  2009 and laterThe 3 preceding taxable years.

											  2008The
						2 preceding taxable years.

											  2007The
						preceding taxable year.

											  2006 or beforeNo reference period applies.

							(6)State required
				drawdown amountThe 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
				balanceThe 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
				generalThe 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), 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
				eventFor purposes of
				subparagraph (A), the term qualifying event means any event that
				satisfies clauses (i) and (ii).
								(i)EventAn 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
				designationAn 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
				generalThe 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 capFor 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 multipliersFor 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
						AnnualFund 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

											  Earthquake13.00

											  Inland Marine 0.25.

							(D)Subsequent
				modifications of the annual statement blankIf, 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-inNotwithstanding
				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:

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

											20065 percent

											200710 percent

											200815 percent

											200920 percent

											201025 percent

											201130 percent

											201235 percent

											201340 percent

											201445 percent

											201550 percent

											201655 percent

											201760 percent

											201865 percent

											201970 percent

											202075 percent

											202180 percent

											202285 percent

											202390 percent

											202495 percent

											2025 and later100 percent

							(10)Treatment of
				investment income and gain or loss
							(A)Contributions in
				kindA 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
				kindA 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 assetsItems
				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 lossFor 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
				statementFor 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 risksNotwithstanding 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)RegulationsThe 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
			 dateThe amendments made by
			 this section shall apply to taxable years beginning after December 31,
			 2005.