2000
<PRE>[DOCID: f:h785ih.txt]






107th CONGRESS
  1st Session
                                H. R. 785

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 HOUSE OF REPRESENTATIVES

                           February 28, 2001

   Mr. Foley (for himself, Mr. Matsui, Mr. Gonzalez, Mr. Royce, Mr. 
 Tanner, Mr. McInnis, Mr. Crane, Mr. Herger, Mr. Watkins, Mr. English, 
Mr. Sam Johnson of Texas, Mr. Hayworth, Mr. Houghton, Mr. Portman, Mr. 
 Watts of Oklahoma, Ms. Pryce of Ohio, Mr. Ehrlich, Mr. Chambliss, Mr. 
   Miller of Florida, Mr. Jones of North Carolina, Mr. Bonilla, Mr. 
 Boehner, Mr. Radanovich, Mr. Hinchey, Mr. Cannon, Mr. Paul, Mrs. Meek 
 of Florida, Mr. Chabot, Ms. Jackson-Lee of Texas, Mr. Doolittle, and 
 Mr. Calvert) introduced the following bill; which was referred to the 
                      Committee on Ways and Means

_______________________________________________________________________

                                 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 2001''.

SEC. 2. FINDINGS.

    The Congress makes the following findings:
            (1) Rising costs resulting from natural disasters are 
        placing an increasing strain on the ability of property and 
        casualty insurance companies to assure payment of homeowners' 
        claims and other insurance claims arising from major natural 
        disasters now and in the future.
            (2) Present tax laws do not provide adequate incentives to 
        assure that natural disaster insurance is provided or, where 
        such insurance is provided, that funds are available for 
        payment of insurance claims in the event of future catastrophic 
        losses from major natural disasters, as present law requires an 
        insurer wishing to accumulate surplus assets for this purpose 
        to do so entirely from its after-tax retained earnings.
            (3) Revising the tax laws applicable to the property and 
        casualty insurance industry to permit carefully controlled 
        accumulation of pretax dollars in separate reserve funds 
        devoted solely to the payment of claims arising from future 
        major natural disasters will provide incentives for property 
        and casualty insurers to make natural disaster insurance 
        available, will give greater protection to the Nation's 
        homeowners, small businesses, and other insurance consumers, 
        and will help assure the future financial health of the 
        Nation's insurance system as a whole.
            (4) Implementing these changes will reduce the possibility 
        that a significant portion of the private insurance system 
        would fail in the wake of a major natural disaster and that 
        governmental entities would be required to step in to provide 
        relief at taxpayer expense.

SEC. 3. CREATION OF POLICYHOLDER DISASTER PROTECTION FUNDS; 
              CONTRIBUTIONS TO AND DISTRIBUTIONS FROM FUNDS; OTHER 
              RULES.

    (a) Contributions to Policyholder Disaster Protection Funds.--
Subsection (c) of section 832 of the Internal Revenue Code of 1986 
(relating to the taxable income of insurance companies other than life 
insurance companies) is amended by striking ``and'' at the end of 
paragraph (12), by striking the period at the end of paragraph (13) and 
inserting ``; and'', and by adding at the end the following new 
paragraph:
            ``(14) the qualified contributions to a policyholder 
        disaster protection fund during the taxable year.''.
    (b) Distributions From Policyholder Disaster Protection Funds.--
Paragraph (1) of section 832(b) of such Code is amended by striking 
``and'' at the end of subparagraph (D), by striking the period at the 
end of subparagraph (E) and inserting ``, and'', and by adding at the 
end the following new subparagraph:
                    ``(F) the amount of any distributions from a 
                policyholder disaster protection fund during the 
                taxable year, except that a distribution made to return 
                to the qualified insurance company any contribution 
                which is not a qualified contribution (as defined in 
                subsection (h)) for a taxable year shall not be 
                included in gross income if such distribution is made 
                prior to the filing of the tax return for such taxable 
                year.''.
    (c) Definitions and Other Rules Relating to Policyholder Disaster 
Protection Funds.--Section 832 of such Code (relating to insurance 
company taxable income) is amended by adding at the end the following 
new subsection:
    ``(h) Definitions and Other Rules Relating to Policyholder Disaster 
Protection Funds.--For purposes of 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 no less frequently than 
                        annually,
                            ``(iii) an excess balance drawdown amount 
                        is required to be distributed to the qualified 
                        insurance company no later than the close of 
                        the taxable year following the taxable year for 
                        which such amount is determined,
                            ``(iv) a catastrophe drawdown amount may be 
                        distributed to the qualified insurance company 
                        if distributed prior to the close of the 
                        taxable year following the year for which such 
                        amount is determined,
                            ``(v) a State required drawdown amount may 
                        be distributed, and
                            ``(vi) no distributions from the fund are 
                        required or permitted other than the 
                        distributions described in clauses (ii) through 
                        (v) and the return to the qualified insurance 
                        company of contributions that are not qualified 
                        contributions.
            ``(2) Qualified insurance company.--The term `qualified 
        insurance company' means any insurance company subject to tax 
        under section 831(a).
            ``(3) Qualified contribution.--The term `qualified 
        contribution' means a contribution to a fund for a taxable year 
        to the extent that the amount of such contribution, when added 
2000

        to the previous contributions to the fund for such taxable 
        year, does not exceed the excess of--
                    ``(A) the fund cap for the taxable year, over
                    ``(B) the fund balance determined as of the close 
                of the preceding taxable year.
            ``(4) Excess balance drawdown amounts.--The term `excess 
        balance drawdown amount' means the excess (if any) of--
                    ``(A) the fund balance as of the close of the 
                taxable year, over
                    ``(B) the fund cap for the following taxable year.
            ``(5) Catastrophe drawdown amount.--
                    ``(A) In general.--The term `catastrophe drawdown 
                amount' means an amount that does not exceed the lesser 
                of the amount determined under subparagraph (B) or (C).
                    ``(B) Net losses from qualifying events.--The 
                amount determined under this subparagraph shall be 
                equal to the qualified losses for the taxable year 
                determined without regard to clause (ii) of paragraph 
                (8)(A).
                    ``(C) Gross losses in excess of threshold.--The 
                amount determined under this subparagraph shall be 
                equal to the excess (if any) of--
                            ``(i) the qualified losses for the taxable 
                        year, over
                            ``(ii) the lesser of--
                                    ``(I) the fund cap for the taxable 
                                year (determined without regard to 
                                paragraph (9)(E)), or
                                    ``(II) 30 percent of the qualified 
                                insurance company's surplus as regards 
                                policyholders as shown on the company's 
                                annual statement for the calendar year 
                                preceding the taxable year.
                    ``(D) Special drawdown amount following a recent 
                catastrophe loss year.--If for any taxable year 
                included in the reference period the qualified losses 
                exceed the amount determined under subparagraph 
                (C)(ii), the `catastrophe drawdown amount' shall be an 
                amount that does not exceed the lesser of the amount 
                determined under subparagraph (B) or the amount 
                determined under this subparagraph. The amount 
                determined under this subparagraph shall be an amount 
                equal to the excess (if any) of--
                            ``(i) the qualified losses for the taxable 
                        year, over
                            ``(ii) the lesser of--
                                    ``(I) \1/3\ of the fund cap for the 
                                taxable year (determined without regard 
                                to paragraph (9)(E)), or
                                    ``(II) 10 percent of the qualified 
                                insurance company's surplus as regards 
                                policyholders as shown on the company's 
                                annual statement for the calendar year 
                                preceding the taxable year.
                    ``(E) Reference period.--For purposes of 
                subparagraph (D), the reference period shall be 
                determined under the following table:

``For a taxable year                The reference period
  beginning in--                      shall be--
        2005 and later.............
                                        The 3 preceding taxable years.
        2004.......................
                                        The 2 preceding taxable years.
        2003.......................
                                        The preceding taxable year.
        2002 or before.............
                                        No reference period applies.

            ``(6) State required drawdown amount.--The term `State 
        required drawdown amount' means any amount that the department 
        of insurance for the qualified insurance company's jurisdiction 
        of domicile requires to be distributed from the fund, to the 
        extent such amount is not otherwise described in paragraph (4) 
        or (5).
            ``(7) Fund balance.--The term `fund balance' means--
                    ``(A) the sum of all qualified contributions to the 
                fund,
                    ``(B) less any net investment loss of the fund for 
                any taxable year or years, and
                    ``(C) less the sum of all distributions under 
                clauses (iii) through (v) of paragraph (1)(B).
            ``(8) Qualified losses.--
                    ``(A) In general.--The term `qualified losses' 
                means, with respect to a taxable year--
                            ``(i) the amount of losses and loss 
                        adjustment expenses incurred in the qualified 
                        lines of business specified in paragraph (9), 
                        net of reinsurance, as reported in the 
                        qualified insurance company's annual statement 
                        for the taxable year, that are attributable to 
                        one or more qualifying events (regardless of 
                        when such qualifying events occurred),
                            ``(ii) the amount by which such losses and 
                        loss adjustment expenses attributable to such 
                        qualifying events have been reduced for 
                        reinsurance received and recoverable, plus
                            ``(iii) any nonrecoverable assessments, 
                        surcharges, or other liabilities that are borne 
                        by the qualified insurance company and are 
                        attributable to such qualifying events.
                    ``(B) Qualifying event.--For purposes of 
                subparagraph (A), the term `qualifying event' means any 
                event that satisfies clauses (i) and (ii).
                            ``(i) Event.--An event satisfies this 
                        clause if the event is 1 or more of the 
                        following:
                                    ``(I) Windstorm (hurricane, 
                                cyclone, or tornado).
                                    ``(II) Earthquake (including any 
                                fire following).
                                    ``(III) Winter catastrophe (snow, 
                                ice, or freezing).
                                    ``(IV) Fire.
                                    ``(V) Tsunami.
                                    ``(VI) Flood.
                                    ``(VII) Volcanic eruption.
                                    ``(VIII) Hail.
                            ``(ii) Catastrophe designation.--An event 
                        satisfies this clause if the event--
                                    ``(I) is designated a catastrophe 
                                by Property Claim Services or its 
                                successor organization,
                                    ``(II) is declared by the President 
                                to be an emergency or disaster, or
                                    ``(III) is declared to be an 
                                emergency or disaster in a similar 
                                declaration by the chief executive 
                                official of a State, possession, or 
                                territory of the United States, or the 
                                District of Columbia.
            ``(9) Fund cap.--
                    ``(A) In general.--The term `fund cap' for a 
                taxable year is the sum of the separate lines of 
 
2000
               business caps for each of the qualified lines of 
                business specified in the table contained in 
                subparagraph (C) (as modified under subparagraphs (D) 
                and (E)).
                    ``(B) Separate lines of business cap.--For purposes 
                of subparagraph (A), the separate lines of business 
                cap, with respect to a qualified line of business 
                specified in the table contained in subparagraph (C), 
                is the product of--
                            ``(i) net written premiums reported in the 
                        annual statement for the calendar year 
                        preceding the taxable year in such line of 
                        business, multiplied by
                            ``(ii) the fund cap multiplier applicable 
                        to such qualified line of business.
                    ``(C) Qualified lines of business and their 
                respective fund cap multipliers.--For purposes of this 
                paragraph, the qualified lines of business and fund cap 
                multipliers specified in this subparagraph are those 
                specified in the following table:

                ``Line of Business on Annual
                                                               Fund Cap
                  Statement Blank:
                                                            Multiplier:
                    Fire...................................       0.25 
                    Allied.................................       1.25 
                    Farmowners Multiple Peril..............       0.25 
                    Homeowners Multiple Peril..............       0.75 
                    Commercial Multi Peril (non-liability         0.50 
                    portion).
                    Earthquake.............................      13.00 
                    Inland Marine..........................       0.25.
                    ``(D) Subsequent modifications of the annual 
                statement blank.--If, with respect to any taxable year 
                beginning after the effective date of this subsection, 
                the annual statement blank required to be filed is 
                amended to replace, combine, or otherwise modify any of 
                the qualified lines of business specified in 
                subparagraph (C), then for such taxable year 
                subparagraph (C) shall be applied in a manner such that 
                the fund cap shall be the same amount as if such 
                reporting modification had not been made.
                    ``(E) 20-year phase-in.--Notwithstanding 
                subparagraph (C), the fund cap for a taxable year shall 
                be the amount determined under subparagraph (C), as 
adjusted pursuant to subparagraph (D) (if applicable), multiplied by 
the phase-in percentage indicated in the following table:

                  
                                          Phase-in percentage to be    
                ``Taxable year
                                           applied to fund cap computed
                  beginning in:
                                       under subparagraphs (A) and (B):
                    2002.............................     5 percent    
                    2003.............................    10 percent    
                    2004.............................    15 percent    
                    2005.............................    20 percent    
                    2006.............................    25 percent    
                    2007.............................    30 percent    
                    2008.............................    35 percent    
                    2009.............................    40 percent    
                    2010.............................    45 percent    
                    2011.............................    50 percent    
                    2012.............................    55 percent    
                    2013.............................    60 percent    
                    2014.............................    65 percent    
                    2015.............................    70 percent    
                    2016.............................    75 percent    
                    2017.............................    80 percent    
                    2018.............................    85 percent    
                    2019.............................    90 percent    
                    2020.............................    95 percent    
                    2021 and later...................  100 percent.    
            ``(10) Treatment of investment income and gain or loss.--
                    ``(A) Contributions in kind.--A transfer of 
                property other than money to a fund shall be treated as 
                a sale or exchange of such property for an amount equal 
                to its fair market value as of the date of transfer, 
                and appropriate adjustment shall be made to the basis 
                of such property. Section 267 shall apply to any loss 
                realized upon such a transfer.
                    ``(B) Distributions in kind.--A transfer of 
                property other than money by a fund to the qualified 
                insurance company shall not be treated as a sale or 
                exchange or other disposition of such property. The 
                basis of such property immediately after such transfer 
                shall be the greater of the basis of such property 
                immediately before such transfer or the fair market 
                value of such property on the date of such transfer.
                    ``(C) Income with respect to fund assets.--Items of 
                income of the type described in paragraphs (1)(B), 
                (1)(C), and (2) of subsection (b) that are derived from 
                the assets held in a fund, as well as losses from the 
                sale or other disposition of such assets, shall be 
                considered items of income, gain, or loss of the 
                qualified insurance company. Notwithstanding paragraph 
                (1)(F) of subsection (b), distributions of net income 
                to the qualified insurance company pursuant to 
                paragraph (1)(B)(ii) of this subsection shall not cause 
                such income to be taken into account a second time.
            ``(11) Net income; net investment loss.--For purposes of 
        paragraph (1)(B)(ii), the net income derived from the assets in 
        the fund for the taxable year shall be the items of income and 
        gain for the taxable year, less the items of loss for the 
        taxable year, derived from such assets, as described in 
        paragraph (10)(C). For purposes of paragraph (7), there is a 
        net investment loss for the taxable year to the extent that the 
        items of loss described in the preceding sentence exceed the 
        items of income and gain described in the preceding sentence.
            ``(12) Annual statement.--For purposes of this subsection, 
        the term `annual statement' shall have the meaning set forth in 
        section 846(f)(3).
            ``(13) Exclusion of premiums and losses on certain puerto 
        rican risks.--Notwithstanding any other provision of this 
        subsection, premiums and losses with respect to risks covered 
        by a catastrophe reserve established under the laws or 
        regulations of the Commonwealth of Puerto Rico shall not be 
        taken into account under this subsection in determining the 
        amount of the fund cap or the amount of qualified losses.
            ``(14) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry out the 
        purposes of this subsection, including regulations--
                    ``(A) which govern the application of this 
                subsection to a q
24a
ualified insurance company having a 
                taxable year other than the calendar year or a taxable 
                year less than 12 months,
                    ``(B) which govern a fund maintained by a qualified 
                insurance company that ceases to be subject to this 
                part, and
                    ``(C) which govern the application of paragraph 
                (9)(D).''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.
                                 &lt;all&gt;

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