Case Study:

Cape Agulhas is a small coastal town situated at the southern tip of Africa. It is a popular holiday area with several holiday homes and beach houses. The camping$/$caravan park, situated close to the sea $($about $20$ metres from the high$-$water mark$),$ belongs to the local municipality. It has been neglected and has therefore failed to attract holidaymakers, so it is currently not a successful business enterprise.

Mr Khoza, a local entrepreneur, negotiated with the municipality to hire the camping$/$caravan park so that he could upgrade the facilities and manage them as a profitable business. The municipality agreed to rent the park to Mr Khoza for R$30000$ per month. This amount includes the supply of fresh water but excludes electricity usage.

A major concern for Mr Khoza is the threat of fire. Being a coastal town, the wind speed can reach up to $50$ knots, regarded as a gale force that could cause an uncontrollable fire. Consequently, Mr Khoza has insured the park against fire for R$1$m$,$ at a monthly premium of R$10000.$ Another problem is the vulnerability of campers$/$caravaners to theft. Owing to the location of the camping ground, there is an increasing incidence of theft and burglary. However, a clause in the camp rules, which must be signed by each client$/$visitor$,$ states that the park$$s management is not responsible for any losses due to theft or natural causes. There is also a clause that states that the park$$s management is not responsible for any losses suffered by campers because of the unavailability of the park due to unforeseen natural causes $($fires$,$ floods, etc.$).$ However, Mr Khoza has the responsibility to pay for his expenses for a period of three months should the park be unable to generate any income. Therefore, Mr Khosa should ensure that he is able to cover this potential expense in the event of a potential loss of business. In this regard, he decided to take out an additional insurance policy of R$1$m at a premium of R$10000$ pm$.$ Further analysis indicated that the average value of current assets present on one occupied camping site at a time is R$1000000.$ This amount includes, for example, a caravan, camping equipment and vehicles. Sometimes there is more than one vehicle parked on a camping site, which should be prohibited because it takes up unnecessary space and increases the risk of loss, should a fire occur. Accordingly, when the park is fully occupied, the total value of the risk for clients is R$100$m$.$ To cover these assets of campers against any losses, Mr Khosa is considering "transferring" the risk to a $3$rd party in the future by taking out an additional insurance policy of R$1$m at a premium of R$10000$ pm$.$

Question:

Insurance forms an important part of risk appetite. However, it is necessary for a business to be adequately insured. Explain the risk transfer concept and analyse the insurance adequacy for the caravan park, considering all the relevant information in the case study. Make a final recommendation that will ensure adequate insurance cover for Mr Khoza.