The first question occur to mind what is granualarity and how is it that important for a General Insurance business?
Breaking down Granularity
Granularity is subdivision. If the business is subdivided by class, currency, territory, major risk groups within a class and such other subdivisions, one may expect reasonable homogeneity in the subdivisions of the business.
This happens because the chosen subdivisions would reflect the distinctive features of risk of the subdivisions. Granularity helps an Actuary to allocate and use assumptions sub division wise.
What is Granularity not followed?
If appropriate subdivisions are not chosen, then the pricing of products, estimation of claim reserves and the overall results are subject to volatility, higher degree of uncertainty, inadequate capital or poor return on capital employed.
Real life problems in Granularity in GI business
Data available in certain subdivisions may be insufficient to apply statistical methods and use valid tests. In some cases, no data may be available.
Purpose and use of model
Level of granularity has to consider the purpose and use of the model. There may be business reasons why a fully theoretical level of subdivision may not be used. The size of the model and the time to run, review and test the model is an important practical consideration.
Chosen Level of Risk Tolerance
In a theoretical approach the chosen level of risk tolerance may imply, too fine a level of granularity leading to need for more than available data in some cells. Often, more data are needed to assess variability in claim experience than for a mean claim frequency or Severity refers to the amount you have received Insurance claim for. Average Severity would be the loss associated with an average Insurance claim. measure.
Same Level of Granularity
Often, pricing is made by reference to commonly accepted rating factors rather than by using all relevant risk factors and, in a capital modelling exercise, it may be considered as appropriate to use the same level of granularity.
Thus, in practicing capital modelling, the actual level chosen is a compromise solution, particularly for some of the less material risks, applying the principle of proportionality.