Fall 2016, #14b

sant93sant93
in CCIR.ARinstr

This might be a silly question...but why do we exclude the APV for AY2015?

How would the answer be different had the question been "calculate the excess/def for all prior AYs in CY2015"?

Comments

  • grahamgraham

    Your question is a variation on a very common question about calculating excess/deficiency ratios. You've probably seen this but for anyone else reading this post, here's a link to the solution to this problem provided in the wiki:

    It isn't so much that we are specifically excluding AY2015. It's just that if we are in CY2015, then we simply cannot yet calculate an excess or deficiency for AY2015. The reason is that we only have 1 APV estimate for AY2015 but to calculate an excess/deficiency ratio, we need at least one more estimate to compare it to.

    To elaborate a little bit:

    • At the beginning of CY2015, the APV estimate for AY2015 (based on current data) is 0 because there won't have been any claims yet.
    • At the end of CY2015, we will be able to estimate APV for AY2015 because we will have a full year of data. Call the estimate APV1
    • At the end of CY2016, we will then have a second year of data for AY2015 and we can use that to update our APV estimate of AY2015. Call this new estimate APV2.

    Presumably, APV2 will be a better estimate than APV1. The calculation of excess/deficiency basically just evaluates how good APV1 was based on the newer estimate APV2. Continuing:

    • At the end of CY2017, we will then have a third year of data for AY2015 and we can use that to update our APV estimate of AY2015 again. Call this new estimate APV3.

    Then we can use this even better estimate, APV3, to re-evaluate the excess/deficiency of APV1. So the point is that the excess/deficiency formula only works if we have 2 separate APV estimates, and we assume the latest estimate is more accurate (because we have more data.)

    So getting back to your original question: If we only have the first estimate APV1 at the end of CY2015, we cannot calculate an excess/deficiency for AY2015 because we don't yet have any other (better) estimates for comparison.

    About your second question:

    • How would the answer be different had the question been "calculate the excess/def for all prior AYs in CY2015"?

    The answer wouldn't be any different because you can only use AYs prior to CY2015 anyway.

  • sant93sant93

    This was exactly the response I needed. Thank you!!

  • grahamgraham

    Great!

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