NAICS Code Analysis: Identifying Hidden Liability Exposures

Across the insurance industry, NAICS codes are commonly used to classify businesses and estimate risk. These codes appear on applications, regulatory filings, and internal systems. For many underwriting teams, NAICS codes are a familiar part of the submission process.

Many workflows rely on a business's primary NAICS code alone for classification. That single data point may not fully represent all the activities a business performs. As a result, important liability exposures may not be recognized in the underwriting review.

This article examines how NAICS codes are assigned, how they relate to insurance risk, and how deeper analysis can uncover exposures that are not obvious at first glance.

What Is NAICS And Why It Matters

NAICS stands for the North American Industry Classification System. Federal statistical agencies in the United States, Canada, and Mexico use it to classify businesses by their main economic activity.

Each NAICS code contains 2 to 6 digits. The more digits, the more specific the classification. The structure is hierarchical, with each level building on the one before it:

The NAICS system replaced the older Standard Industrial Classification (SIC) system in 1997. It gets updated every five years to reflect changes in how businesses operate.

A business typically receives one NAICS code based on its primary activity, the one that generates the most revenue. Various federal agencies use this classification:

• U.S. Census Bureau for economic surveys
• Bureau of Labor Statistics for employment data
• Social Security Administration for earnings coverage
• Environmental Protection Agency for regulatory compliance

In insurance, NAICS codes help estimate potential liability exposures. For example, a business under code 238220 (Plumbing and HVAC Contractors) likely has premises liability, product liability, and contractor-related workers' compensation risk.

But using just the primary NAICS code can miss important exposures:

• Secondary operations: Activities like warehousing or delivery may not appear in the main code
• Business evolution: The code may be outdated if operations have changed
• Agency differences: Different government agencies might assign different codes to the same business

How NAICS Codes Get Assigned And Updated

NAICS codes are assigned based on a business's main economic activity—the one that produces the most income. While the U.S. Census Bureau leads this process, other agencies like the Bureau of Labor Statistics and Social Security Administration also assign codes for their specific purposes.

These agencies may classify the same business differently. The Census Bureau might use survey data, while the BLS relies on employment records. These differences happen because each agency collects data for different reasons.

NAICS codes get reviewed and updated every five years by the Economic Classification Policy Committee. The committee adds new codes, revises existing ones, or removes outdated classifications. The last update happened in 2022, with the next one expected in 2027.

When codes become outdated, risk assessment suffers. A business that has changed what it does may still have an old classification that doesn't match its current operations. This mismatch can hide important liability exposures.

Outdated codes create blind spots for several reasons:

• The business expanded into new areas not covered by its original code
• The main source of revenue changed but the classification didn't
• Different agencies assigned conflicting codes
• New industries emerged that don't fit existing categories

Remember that NAICS codes focus on the activity generating the most revenue, not all activities a business performs. This limitation means secondary operations—which might create significant liability—often go unnoticed in standard reviews.

Uncovering Hidden Liability Through NAICS Analysis

Looking beyond a business's primary NAICS code can reveal liability exposures that might otherwise go unnoticed. These hidden risks often come from operations not reflected in the main classification. Here are four systematic approaches to find these exposures:

1. Review Internal Operations

Businesses often do more than what their primary NAICS code suggests. To find hidden exposures, look at everything the business actually does:

• Compare job roles, equipment, and materials across departments
• Identify customer-facing activities, physical labor, and specialized services
• Watch for operational changes like new product lines or services

For example, a furniture wholesaler (NAICS 423210) might also operate delivery trucks and provide in-home assembly. These activities bring additional workers' compensation and liability exposures not captured in the wholesale classification.

2. Examine Multiple Regulatory Sources

Different government agencies may assign different NAICS codes to the same business. These variations can point to activities that create additional liability exposures.

Look for classification differences in:

• U.S. Census Bureau records
• Bureau of Labor Statistics data
• State business registration databases
• Environmental or safety regulatory filings

When a business has different codes across agencies, it often means the business performs multiple types of work. Each activity may bring its own liability exposures.

3. Match Ancillary Activities

Ancillary activities support the main business but don't always show up in the primary NAICS code. These secondary operations can create significant liability exposures.

To find ancillary activities:

• Review business websites and marketing materials
• Check job postings that suggest additional operations
• Look at organizational charts and operational reports

Common examples include:

• A manufacturer with its own retail storefront
• A software company that provides on-site technical support
• A construction firm that leases equipment to others

Each of these activities brings different liability exposures that might not be obvious from the primary classification.

4. Verify Correct NAICS Levels

NAICS codes range from broad 2-digit sectors to specific 6-digit industries. A business with a broad code assignment might need a more specific classification to accurately reflect its operations.

To check for proper classification level:

• Start with the assigned code and look for more specific options
• Compare the business's activities to official NAICS descriptions
• Consider whether more detailed classification would better capture liability exposures

For example, a business under code 5416 (Management Consulting) might actually focus on human resources consulting (541612). The more specific code better reflects the professional liability exposures associated with HR advice.

Identifying Misclassifications And Secondary Codes

Sometimes businesses get assigned NAICS codes that don't accurately reflect what they do. In other cases, a business might qualify for multiple codes because it performs different types of work. Finding these misclassifications and missing secondary codes helps uncover hidden liability exposures.

1. Check Revenue Distribution

NAICS codes typically get assigned based on the activity that generates the most revenue. But when a business has multiple revenue streams, important secondary activities might qualify for their own classifications.

• Review financial reports that break down revenue by business line
• Look for activities that contribute 10% or more of total revenue
• Track revenue trends to catch gradual shifts in business focus

For example, a software development company (NAICS 541511) might also have a growing IT support service. If that service generates significant revenue, code 541513 (Computer Facilities Management) might also apply, bringing different liability considerations.

2. Consult Cross-Agency Registrations

Different government agencies often classify the same business in different ways. These variations can reveal overlooked activities or misclassifications.

Helpful sources include:

• Census Bureau economic records
• IRS business tax classifications
• State business registration databases
• EPA permits or environmental filings
• OSHA inspection records

When these sources show different classifications for the same business, it suggests the business performs multiple activities that might create various liability exposures.

3. Use Periodic Updates

As businesses evolve, their NAICS codes can become outdated. Regular reviews help keep classifications current with actual operations.

Effective update practices include:

• Annual reviews for stable industries
• Quarterly checks for fast-changing businesses
• Special reviews after mergers, acquisitions, or major operational changes
• Documentation of each review for compliance purposes

Regular updates help maintain accurate classifications and reduce the risk of missing important liability exposures due to outdated information.

4. Track Emerging Business Models

Some businesses operate in ways that don't fit neatly into existing NAICS categories. These hybrid or innovative models often combine multiple services or create entirely new types of economic activity.

To classify these businesses:

• Identify the core function that generates most revenue
• Look for components that match existing NAICS codes
• Consider whether multiple classifications might be needed

Examples include telemedicine platforms that combine healthcare delivery and technology services, or companies that blend e-commerce, warehousing, and delivery into integrated operations.

Best Practices For Connecting NAICS And Insurance Codes

NAICS codes describe what a business does. Insurance class codes group similar risks for coverage purposes. Connecting these two systems, often called "crosswalking", helps ensure all liability exposures get properly identified and covered.

There's rarely a perfect one-to-one match between NAICS and insurance codes. A single NAICS classification might relate to multiple insurance categories, depending on specific operations. Here's how to make these connections effectively:

1. Use Available Crosswalk Tools

Several resources can help map NAICS codes to insurance classifications:

Public resources:

• U.S. Census Bureau's NAICS search tool
• National Crosswalk Service Center data
• State workers' compensation classification guides

Industry resources:

• NCCI manuals for workers' compensation
• ISO guides for general liability codes
• Insurance carrier mapping systems

These tools provide starting points for connecting business classifications to appropriate insurance categories. They range from simple lookup tables to sophisticated mapping systems that consider multiple factors.

2. Compare With Loss History

Loss history, which is the record of past insurance claims, can reveal whether current classifications accurately reflect actual exposures.

This process involves:

• Reviewing claims data by cause, frequency, and severity
• Grouping claims by NAICS code to identify patterns
• Checking whether insurance classifications match observed loss trends

For instance, if a janitorial service (NAICS 561720) shows frequent claims related to ladder falls, it might actually be performing building maintenance activities with different risk characteristics than basic cleaning.

3. Apply AI For Better Classification

Artificial intelligence tools can improve the accuracy of connecting NAICS codes to insurance classifications by analyzing large datasets and finding patterns humans might miss.

AI applications include:

• Natural language processing to extract details from business descriptions
• Predictive models that suggest insurance codes based on multiple factors
• Classification systems that identify secondary activities from various data sources

These tools help spot mismatches between NAICS codes and insurance classifications, especially for businesses with complex operations or emerging business models.

4. Review Classifications Regularly

NAICS-to-insurance code connections can become outdated as businesses change. Regular reviews help maintain accurate classifications.

A typical quarterly review includes:

• Checking for changes in business operations or revenue sources
• Comparing current classifications with recent claims experience
• Validating insurance codes against updated business information
• Adjusting classifications when necessary to reflect current exposures

Regular reviews help ensure that insurance coverage aligns with actual business operations and liability exposures.

Moving Forward With Data-Driven Underwriting

Advanced NAICS code analysis represents an important step in the evolution of insurance underwriting. As the industry moves toward more data-driven approaches, the ability to extract deeper insights from business classifications becomes increasingly valuable.

The future of NAICS-based underwriting includes:

• AI-powered validation of business classifications
• Automated identification of secondary activities and exposures
• Portfolio-level analysis to spot industry concentrations
• Continuous updates that reflect changing business operations

These advances help insurance teams focus on the most promising opportunities while maintaining a clear understanding of liability exposures across their book of business.

FAQs About NAICS Code Analysis