Use and Value of Multiple-Period Forecasts in a Dynamic Model of the Cost-Loss Ratio Situation

Abstract On most forecasting occasions forecasts are made for several successive periods, but decision-making models have traditionally neglected the impact of the potentially useful information contained in forecasts for periods beyond the initial period. The use and value of multiple-period forecasts are investigated here in the context of a recently developed dynamic model of the basic cost-loss ratio situation. We also extend previous studies of this model by examining the impacts—on forecast use and value—of assuming (i) that weather events in successive periods are dependent and (ii) that the forecasts of interest are expressed in probabilistic terms. In this regard, expressions are derived for the expected expenses associated with the use of climatological, imperfect (categorical or probabilistic) and perfect multiple-period forecasts under conditions of dependence and independence between events. Numerical results are presented concerning expected expense and economic value, based on artificially ...