Choosing Between SIC and NAICS Codes for Modern Underwriting

Why Industry Classification Matters in Underwriting

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.

What Are SIC and NAICS Codes?

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:

• Determine appetite fit
• Analyze historical loss trends
• Benchmark risk levels within industry cohorts

Why Modern Underwriters Prefer NAICS

While both systems remain in use, NAICS offers notable advantages:

• Greater specificity: Six digits allow for granular risk differentiation.
• Up-to-date structure: Reflects evolving industries like SaaS, biotech, and e-commerce.
• Service industry alignment: Better representation of today’s economy.
• Cross-border consistency: Standardized across North America.

However, SIC codes persist due to:

• Legacy systems and historical loss data tied to SIC.
• Regulatory reporting requirements.
• Continued relevance for traditional or unchanged industries.

Many insurers maintain dual support for SIC and NAICS, especially during transition phases or for back-testing models.

Structural Differences That Affect Risk Evaluation

The way each system defines and groups industries has practical implications for risk classification.

• SIC codes group businesses by final product.
• NAICS codes group businesses by production process or service delivery.

For example:

• SIC may broadly classify technology companies under a generic "Services" category.
• NAICS distinguishes between web hosting (518210), software publishing (511210), and data processing (518210).

This granularity allows underwriters to apply more precise pricing models and underwriting guidelines.

Converting Between NAICS and SIC Codes

Conversions are often needed to reconcile legacy data or support regulatory compliance.

Step 1: Define Business Scope

Understand the core business activity. NAICS may have multiple SIC equivalents or none at all if the industry is new.

Example:

• NAICS 517311 (Wired Telecommunications Carriers) maps approximately to SIC 4813.

Step 2: Use Crosswalk Tools

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.

Step 3: Validate the Conversion

Review against:

• Peer classifications
• Internal guidelines
• Loss history accuracy

Watch for:

• One-to-many mappings
• Misclassified hybrid businesses
• New industries without SIC counterparts

Transitioning from SIC to NAICS: Key Considerations

1. Map Existing SIC Data

Inventory how SIC codes are used across:

• Rating models
• Appetite filters
• Regulatory filings

Map each to its most appropriate NAICS equivalent, noting exceptions or custom mappings.

2. Address Emerging Industries

NAICS better supports newer sectors:

• E-commerce: 454110
• SaaS: 511210
• Data analytics: 518210

These distinctions improve segmentation, loss projection, and appetite calibration.

3. Update Underwriting Models

Models tied to SIC inputs must be re-trained or recalibrated for NAICS variables. During the transition, dual coding may be necessary, particularly for:

• In-force business
• Multiline submissions

Most conversions complete in 6–12 months, with temporary parallel processing.

Strategic Takeaways for Underwriters

Choosing between SIC and NAICS affects more than categorization—it influences pricing accuracy, risk appetite targeting, and model development.

• NAICS is preferred for modern, service-oriented, and emerging industries.
• SIC remains viable for legacy portfolios and traditional risks.

FAQs About SIC and NAICS Codes

Q: How should underwriters classify businesses with multiple operations?

‍A: Use the primary revenue-generating activity for classification and note material secondary activities for risk analysis.

Q: Can both SIC and NAICS be used simultaneously?

‍A: Yes. Many systems support dual classification to preserve historical data while transitioning to NAICS.

Q: Which is preferred for international operations?

‍A: NAICS in North America; ISIC or custom adaptations are used globally.

Q: How often are codes updated?

‍A: NAICS is revised every 5 years. SIC has not been significantly updated since 1987.

Q: Where can I find updated NAICS definitions?

‍A: Visit the U.S. Census Bureau NAICS website for current classifications and crosswalk tools.