Finance, Insurance, Real Estate & Leasing (FIRE)

 

Banking, in one form or another, has been around since ancient times, when temples were the safest place to store valuables. There are records of merchants who obtained loans from temple priests in Babylon as early as the 18^th century BC. Greek temples made loans, accepted deposits, exchanged currency, validated coinage and even offered credit to merchants, and interest was charged on loans and paid on deposits in ancient Rome.

Trading in debts, commodities and government securities began in the middle ages. In 1602, the Dutch East India Company became the first company to issue stocks and bonds. Stock market activities were sometimes risky.

During the tulip mania of the 1630s, speculators purchasing options on the exchange drove the cost of a single tulip bulb up to the equivalent of about $76,000. Many of them were bankrupted when bulb prices eventually declined. Stock market speculation during the early 1700s left Britain in debt to the tune of 10 million pounds. The stock market crash of 1929 is widely held to have contributed to the Great Depression. But in between the trading frenzies and inevitable crashes, stock markets provided companies with funds that helped them operate and expand their businesses, as they continue to do.

Although some forms of insurance were available in medieval times, the insurance business has its roots in 1680s London when Edward Lloyd opened a coffee-house where ship owners, captains, and merchants met to get the latest shipping news, and where the business of underwriting shipping ventures began. Lloyd's of London still operates as an insurance underwriter.

BC's finance, insurance, real estate and leasing (FIRE) industry doesn't have a long and storied history. The early settlers (and the Aboriginals before them) didn't have much need for cash, since most goods were exchanged by barter and coins were hard to come by. A small amount of English silver and gold was sent to BC in 1861 and, together with American coins, these were in use until the province joined confederation and adopted the Canadian currency. As the population grew, branch offices of the big banks were eventually opened. The first credit union, born in reaction to the hardships of the Great Depression, opened its doors in South Burnaby in 1936. Credit union membership in BC now surpasses 1.5 million.

What's included in finance, insurance, real estate & leasing?

When the financial services industry is mentioned, some people form a mental image of a banker in a pinstriped suit, or a trader on the floor of the stock exchange, but most of the people who work in FIRE don't resemble that stereotype at all. They're people like the teller at your bank or credit union, the real estate agent who lives next door, your insurance agent, the clerk at the rental agency that manages the apartment building where you live, or the person who works at the video shop where you rent videos or computer games.

So what is included in this industry? All types of banks and banking institutions, from the Bank of Canada and the big chartered banks to your local credit union are part of the finance & insurance component of this industry. Consumer loan, mortgage and credit card companies, investment companies, stock and commodity exchanges and brokerages are also included, as are pension funds, trusts and similar financial vehicles. The group also includes insurance underwriters, agents and brokers.

The real estate, rental & leasing component of the industry includes establishments that rent or lease housing, non-residential buildings and other property, sell real estate on a fee for commission basis, and rent or lease vehicles, computers, consumer goods and industrial machinery and equipment. It also includes establishments that manage or operate buildings–from apartments to office towers and shopping malls.

FIRE is an important industry in BC. Although it employs just 6% of the province‘s workforce, its contribution to British Columbia's economy is significant. In fact, it generates over a fifth of total GDP, considerably more than any other industry.

Banking & financial services and the real estate industry are the biggest employers

How can 6% of the workers produce more than a fifth of the province's total GDP?

The discrepancy between the industry's share of employment and its contribution to GDP may seem puzzling, but there are some factors that help explain the large, and growing, gap between the two measures. The most important reason for the gap is that the industry's GDP includes an estimate of the imputed rental income on owner occupied housing. This is the potential income that homeowners could get if they rented out their residence instead of living in it.

Why is this estimate included? Your home is an asset that has rental value in the marketplace. In economic terms, the benefit you get from living in your house or condo is equal to the amount of rent that you would have to pay for it if you were not the owner. There's no market transaction associated with the use of owner-occupied housing, but paid rent is captured as part of the revenues and GDP of the real estate industry.

Does this matter? Whether people own or rent their homes wouldn't matter as much if the number of renters versus homeowners always stayed the same, or if homeownership was equally common in every economy. However, in order to make comparisons among economies with different characteristics, or to compare the same economy over time, it's important to ensure that the income generated by the use of an asset such as housing is valued in a consistent way.

Suppose, for example, that there was a change in consumer behaviour, so that more people decided to buy, rather than rent, the place they lived in. If this happened, the GDP of the real estate industry would shrink, because less rent would be paid to landlords. Although the stock of housing would still be producing services, the value of those services would not be reflected in a market transaction. The economy would appear to be contracting simply because consumer preferences had changed. However, because imputed rent is included in GDP, the decline in the real estate industry would be offset by an increase in the imputed rental income on owner-occupied housing.

Thus, the value associated with the use of housing, whether owner or tenant-occupied, is always reflected in total GDP. A consistent yardstick is used, so it's possible to make valid comparisons over time or among economies.

Imputed rental income is a significant factor, accounting for about 10% of BC's total GDP. However, there are no jobs associated with this industry and that is one of the reasons for the big gap between GDP and employment in FIRE. But it doesn't explain all of the difference. Even when imputed rental income is excluded, the FIRE industry's share of GDP (12%) is still about twice its share of total employment. The output per worker is higher than in other industries, largely because of the extent to which computer and other technologies are used to produce financial and insurance services.

Technological changes have reduced the financial services industry's need for front-line workers

Banking used to involve mainly face-to-face transactions. Thirty years ago, customers wishing to access their funds would have to visit a bank or credit union during normal banking hours (usually from Monday to Friday, between 10 am and 3 pm) and wait in line to be served by a teller, who could transfer funds between accounts, withdraw or deposit cash and cheques, and provide a number of other services.

Employees usually received a paycheque on payday, which they would then cash at a bank or credit union. Tourists and business travellers had to use credit cards, traveller's cheques or cash to make purchases when they were away from home, since it wasn't easy to get direct access to their bank accounts.

Some people still do their banking this way, but the industry has become much more dependent on technology to deliver services. Automated banking machines (ATMs) or cash dispensers can now be found at corner stores, shopping malls, airports, gas stations, and various other venues. They are quick and convenient to use, and are often accessible 24 hours a day. You can pay bills, transfer funds, and get cash from these types of machines in most parts of the world.

Consumers frequently use debit or credit cards instead of cash to pay for purchases. Many companies use the direct deposit method to pay employees or suppliers. Utilities, newspapers, credit card companies, and other organizations that regularly issue bills offer customers the option of pre-authorizing payments, so funds can be transferred automatically once an invoice has been issued. Online banking services allow customers to pay bills, transfer funds, make investments and otherwise manage their accounts from their office or the comfort of their homes.

Customers have been quick to adopt these methods. According to the Canadian Bankers Association [1], Canadians are the highest per capita users of automated teller machines (ATMs) and debit cards in the world. One in three (34%) Canadians relies mainly on ATMs to do their banking. Other types of self-service banking such as online (23%) and telephone (8%) banking are also common. Only 29% of Canadians primarily use tellers to do their banking.

The investment industry has also adapted to the computer age by offering online investment services to customers. These types of transactions could previously only be made in face-to-face meetings with clients, or over the telephone. Now, clients can obtain information about the past and current performance of stocks, bonds and mutual funds, as well as other types of investments, online.

What does all this mean for the people employed in the financial services industry? A career in banking has traditionally been thought of as a fairly secure one. Canada's banks have been on the scene for decades, and probably will be around for decades to come. The investment industry has been more volatile, with employment and earnings prospects rising and falling with the overall state of the economy.

However, the nature of the work in this industry is changing. It takes a lot fewer tellers to run the day-to-day operations of a financial institution than it used to, while people who can provide financial advice, or have programming or other technical skills are more likely to be in demand.

What's happened since 1990?

The industry's share of employment has fallen slightly, but its contribution to GDP is rising

The industry's share of employment has fallen slightly since 1990, although it still accounts for about 6% of the total. However its share of total GDP has risen from 20% to 22%, largely because imputed rental income has been growing faster than the economy as a whole. The GDP generated by market-based financial, insurance and real estate services has shown slower growth.

Employment in financial services has increased significantly since 1990

Some segments of the industry have seen strong job growth since 1990. Despite the changes in the way financial services are delivered, employment in banking, securities and investments has increased 38% since 1990. The number of jobs in the securities and investment industry has increased 73%. A lot of people invested their savings in stocks, bonds and mutual funds during the 1990s, when the return on these investments was significantly higher than the interest paid on savings accounts. As well, the popularity of registered retirement savings plans (RRSPs) may have contributed to job growth in this industry, since many RRSPs are managed by securities and investment firms.

The insurance industry has taken some hits

While banks and trust companies are usually large corporations with hundreds of employees, insurance companies can range from small family-run businesses that sell insurance policies to large corporations that underwrite them. Employment growth in this component of the FIRE industry has been slightly slower than the average, at about 27% between 1990 and 2005.

The insurance industry is affected by factors such as increases in accidents and natural disasters, or large awards granted by the courts. In recent years it has had to absorb numerous shocks, both financial and otherwise, which have strained the resources of insurance underwriters. These companies often operate all over the world, so events in distant places can have a big effect on the industry's bottom line.

The terrorist attacks of 9/11 not only killed and injured thousands of people, but also caused billions of dollars of damage to property. The impact of the attacks on the insurance industry was magnified because the stock market was already in a downturn, which deepened after 9/11. This hurt the insurance industry because insurers use income from investing premiums to help pay insurance claims. The combination of a reduction in investment earnings and insurance payouts to those harmed by the terrorist attacks meant that insurers had to dig deep into their pockets to make the necessary payouts. This helped drive insurance rates up all over North America, including BC.

A number of natural disasters, such as floods, earthquakes, forest fires and devastating hurricanes in the Gulf Coast states in the late summer of 2005, followed the events of 9/11. The cost of claims arising from these manmade and natural disasters has pushed premium rates up even further, but now that the stock market is back on an upswing future increases may not be as extreme.

The stock market appears to be back on track after plunging in the early 2000s

Real estate is on an upward path, but for how long?

The real estate industry includes small privately-owned operations as well as large national firms. Unlike finance and insurance companies, real estate companies are very sensitive to changes in the state of the economy. The number of jobs in the real estate industry has fluctuated, and in 2005, when the industry was in an upturn, was just 5% higher than in 1990.

The real estate industry is very cyclical: when times are good, people working in this industry can do very well; but during economic downturns, they are very quickly affected. If you are considering a career in real estate, you have to be prepared for both good and bad times.

Consider real estate agents, for example. Many agents are self-employed, and even those who work for others usually earn most of their income from commissions. If they sell a house, they get some money, but if they don't, they're out of luck.

House prices in BC's two largest cities, Vancouver and Victoria, are among the highest in the country. That means that a real estate agent can earn a healthy commission on the sale of a house or condo. The last few years, as well as the first half of the 1990s, were boom years for people working in real estate, but there were a few leaner years in between, when the housing market went into a slump.

BC's housing market is currently in a boom cycle, but it's unlikely that the market will stay as hot as it has been for long. The upturn has been sustained, in part, by pent-up demand following the slow-growth period during the late 1990s. At the same time, interest rates remain at thirty-year lows, and provided you can get financing, it's now possible to buy a house or condo with no down-payment. This has boosted the demand for housing. However, as prices continue to rise, there will be fewer people who can raise the hundreds of thousands of dollars needed to make a purchase, and eventually the current upturn will come to an end.

Rental & leasing arrangements are becoming more common

One strong-growth segment of this industry is rental and leasing, where employment has more than doubled, rising 142% since 1990. The strong growth in this industry is partly due to the increased use of consumer and business leasing arrangements for big-ticket items such as vehicles or office equipment. Other goods that are frequently rented include consumer electronics, videos, and recreational equipment.

What are the most common occupations?

FIRE is a very diverse industry. If you work in the finance, insurance or investment industry, you will probably have a salaried “nine-to-five” type of job. If you're involved in real estate, your hours are more likely to be unpredictable. You'll probably have to work on weekends and evenings, and how much you earn will depend not only on your own efforts, but will be very significantly influenced by other factors over which you may have no control.

Six in ten people working in this industry are in business, finance and administrative occupations

 Six out of ten people working in FIRE are employed in business, finance and administrative occupations. About half of them are in clerical occupations, including tellers and financial service workers. Other common occupations in business, finance and administration include financial officers, securities agents, investment dealers, auditors, financial and investment analysts, property administrators, insurance adjusters, claims examiners and loan agents.

One in five workers are in sales and service occupations, primarily insurance or real estate agents or brokers, janitors, building supervisors and retail sales clerks. Fourteen percent are in management occupations such as brokerage, bank, credit or investment managers, as well as accommodation service or retail trade managers. About 4% work as information systems managers, computer programmers, or in other occupations in natural and applied sciences.

How many people work in FIRE, and how much do they earn?

Finance, insurance, real estate and leasing employed 132,900 people in 2005, with 85,600 working in finance and insurance and 47,400 employed the real estate and leasing Industry. Thirty-five percent of the jobs in this industry are in banking and financial services, while 26% of the workers are employed in the real estate industry (which includes real estate agents, developers and operators). Securities and investment, and rental and leasing firms each employ 10% of the workers in this industry.

The average hourly wage rate in FIRE was $19.89 in 2005, slightly higher than the $19.36 average for all industries in BC. Within the industry, wages were highest in securities ($23), insurance ($23) and banking ($21). They were lowest in real estate ($18), where some workers are paid by commission, and rental and leasing ($14). The usual work week in FIRE was 37 hours long.

What are the characteristics of the workforce?

Most (85%) of the people who work in FIRE are employed full-time. That's slightly higher than the average for the economy as a whole. Fourteen percent of workers have union coverage, well below the 33% average for the economy as a whole.

Women make up 59% of the workforce, but there are distinct differences in the male-female split between the finance and real estate components. Two-thirds of the workers in finance and insurance are female, compared to 45% in the real estate and leasing industry. Unemployment rates in the industry are generally low, averaging 2.9% during the period from 1990 to 2005. The average for all industries was 8.4%.

Self-employment has increased significantly in this industry, more than doubling (+143%) between 1990 and 2005. One in five workers is self-employed. Forty-five percent of the workers in real estate, and 42% of workers in the securities industry, are self-employed, but rates are much lower in other industries within this group, ranging from 4% in banking and financial services to 13% in the rental and leasing industry.

Most of the people who work in this industry are employed at small (fewer than 20 workers) or mid-side (20-99) establishments. This includes people who work for branches of big banks and/or insurance companies, as an establishment is a place of work and not a company. Unless you work for a head or regional office of a financial institution-even if it's one of the big banks, it's unlikely that you'll have more than 100 co-workers.

Most workers in this industry are employed in small and mid-size establishments

Where are the jobs located?

Vancouver is the financial capital of the province, and that's reflected in the location of the jobs in this industry. Two-thirds of the people who work in FIRE are located in the Lower Mainland. In the rest of the province, Vancouver Island/Coast and Thompson-Okanagan are the only regions where the percentage of workers in this industry is similar to their share of the total workforce.

Two-thirds of the jobs in this industry are located in the Lower Mainland

What's the outlook to 2014?

The finance, insurance, real estate and leasing industry has undergone considerable change in the last few decades, and will likely continue to evolve. Employment is expected to increase at about the same rate as in the rest of the economy during the next few years, while GDP is forecast to grow a little faster.

Employment growth is expected to keep pace with the rest of the economy

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[1] More information on  banking practices can be found at the Association's web site, which is http://www.cba.ca/index.php?lang=en