Accurate business classification is foundational to effective commercial underwriting. Industry classification codes, specifically SIC (Standard Industrial Classification) and NAICS (North American Industry Classification System), help underwriters understand a business's primary operations and assess its risk profile.
Both systems categorize companies based on their main activities, but their structural differences and historical contexts influence how well they reflect today’s business landscape. For underwriters, selecting the right classification system can improve risk selection, pricing accuracy, and portfolio consistency.
SIC Codes were developed in the 1930s to classify businesses in a manufacturing-driven economy. They use a four-digit format and focus primarily on the products a business produces.
NAICS Codes, introduced in 1997 by the U.S., Canada, and Mexico, replaced SIC to better reflect a modern, service-oriented economy. NAICS uses a six-digit structure to provide more detailed classification.
In underwriting, these codes are used to:
While both systems remain in use, NAICS offers notable advantages:
However, SIC codes persist due to:
Many insurers maintain dual support for SIC and NAICS, especially during transition phases or for back-testing models.
The way each system defines and groups industries has practical implications for risk classification.
For example:
This granularity allows underwriters to apply more precise pricing models and underwriting guidelines.
Conversions are often needed to reconcile legacy data or support regulatory compliance.
Understand the core business activity. NAICS may have multiple SIC equivalents or none at all if the industry is new.
Example:
Use official resources like the U.S. Census Bureau’s crosswalk tables or automated mapping tools. If no direct match exists, select the closest activity-based SIC code and document the rationale.
Review against:
Watch for:
Inventory how SIC codes are used across:
Map each to its most appropriate NAICS equivalent, noting exceptions or custom mappings.
NAICS better supports newer sectors:
These distinctions improve segmentation, loss projection, and appetite calibration.
Models tied to SIC inputs must be re-trained or recalibrated for NAICS variables. During the transition, dual coding may be necessary, particularly for:
Most conversions complete in 6–12 months, with temporary parallel processing.
Choosing between SIC and NAICS affects more than categorization—it influences pricing accuracy, risk appetite targeting, and model development.
A: Use the primary revenue-generating activity for classification and note material secondary activities for risk analysis.
A: Yes. Many systems support dual classification to preserve historical data while transitioning to NAICS.
A: NAICS in North America; ISIC or custom adaptations are used globally.
A: NAICS is revised every 5 years. SIC has not been significantly updated since 1987.
A: Visit the U.S. Census Bureau NAICS website for current classifications and crosswalk tools.