Learn how insurance companies use NAICS codes to classify your industry and calculate your premiums. Commercial insurers use NAICS codes to determine if your business is in a high risk industry classification and to determine your premium.
How Insurance Companies Use NAICS Codes
What’s the best way to describe your company’s business operations? What type of industry are you involved in? What kinds products or services do you sell? These are some of the questions asked by commercial insurance companies when trying to classify your business by North American Industry Classification System (NAICS) code.
The NAICS was established in 1997 to replace the no longer sufficient SIC system. Insurance companies use NAICS codes to identify customers by industry code. NAICS codes classify the economy into 20 sectors, which are separated into 99 3-digit subsectors, which are divided into 311 4-digit industry groups, which are further subdivided into 709 5-digit industries, and finally disaggregated into 1057 6-digit U.S. industries.
The first two digits designate the largest business sector, the third digit designates the subsector, the fourth digit designates the industry group, and the fifth digit designates particular industries. The last digit designates national industries.
But how does your business classification affect your premiums and insurance cost? Let’s look at some of the the issues aroundhow insurance companies use NAICS codes.
Business NAICS Codes
How insurance companies use NAICS codes. Insurance companies selling commercial insurance use NAICS codes in many ways – to analyze and classify the businesses they insure, or choose not insure. Industry codes help insurers with several analytical processes involving marketing, underwriting, exclusions, loss control, forms, pricing and other operations.
Every company will have a primary NAICS code. This code indicates a company’s primary line of business operations. What determines a company’s primary NAICS code is the code definition is their primary activity – the activity that generates the most revenue for the business. Some small business NAICS code classifications can result in you paying higher premiums for your business insurance. It is important that your business is classified properly.
NAICS Structure
The structure of NAICS is hierarchical. The first two digits of the structure designate the NAICS sectors that represent general categories of economic activities. NAICS classifies all economic activities into 20 sectors. The NAICS sectors, their two-digit codes, and the distinguishing activities of each are:
- 11Agriculture, Forestry, Fishing and Hunting– Activities of this sector are growing crops, raising animals, harvesting timber, and harvesting fish and other animals from farms, ranches, or the animals’ natural habitats.
- 21Mining– Activities of this sector are extracting naturally occurring mineral solids, such as coal and ore; liquid minerals, such as crude petroleum; and gases, such as natural gas; and beneficiating (e.g., crushing, screening, washing, and flotation) and other preparation at the mine site, or as part of mining activity.
- 22Utilities– Activities of this sector are generating, transmitting, and/or distributing electricity, gas, steam, and water and removing sewage through a permanent infrastructure of lines, mains, and pipe.
- 23Construction– Activities of this sector are erecting buildings and other structures (including additions); heavy construction other than buildings; and alterations, reconstruction, installation, and maintenance and repairs.
- 31-33Manufacturing– Activities of this sector are the mechanical, physical, or chemical transformation of materials, substances, or components into new products.
- 42Wholesale Trade– Activities of this sector are selling or arranging for the purchase or sale of goods for resale; capital or durable nonconsumer goods; and raw and intermediate materials and supplies used in production, and providing services incidental to the sale of the merchandise.
- 44-45Retail Trade– Activities of this sector are retailing merchandise generally in small quantities to the general public and providing services incidental to the sale of the merchandise.
- 48-49Transportation and Warehousing– Activities of this sector are providing transportation of passengers and cargo, warehousing and storing goods, scenic and sightseeing transportation, and supporting these activities.
- 51Information– Activities of this sector are distributing information and cultural products, providing the means to transmit or distribute these products as data or communications, and processing data.
- 52Finance and Insurance– Activities of this sector involve the creation, liquidation, or change in ownership of financial assets (financial transactions) and/or facilitating financial transactions.
- 53Real Estate Rental and Leasing– Activities of this sector are renting, leasing, or otherwise allowing the use of tangible or intangible assets (except copyrighted works), and providing related services.
- 54Professional, Scientific, and Technical Services– Activities of this sector are performing professional, scientific, and technical services for the operations of other organizations.
- 55Management of Companies and Enterprises– Activities of this sector are the holding of securities of companies and enterprises, for the purpose of owning controlling interest or influencing their management decisions, or administering, overseeing, and managing other establishments of the same company or enterprise and normally undertaking the strategic or organizational planning and decision-making role of the company or enterprise.
- 56Administrative and Support and Waste Management and Remediation Services– Activities of this sector are performing routine support activities for the day-to-day operations of other organizations.
- 61Educational Services– Activities of this sector are providing instruction and training in a wide variety of subjects.
- 62Health Care and Social Assistance– Activities of this sector are providing health care and social assistance for individuals.
- 71Arts, Entertainment, and Recreation– Activities of this sector are operating or providing services to meet varied cultural, entertainment, and recreational interests of their patrons.
- 72Accommodation and Food Services– Activities of this sector are providing customers with lodging and/or preparing meals, snacks, and beverages for immediate consumption.
- 81Other Services (except Public Administration)– Activities of this sector are providing services not elsewhere specified, including repairs, religious activities, grantmaking, advocacy, laundry, personal care, death care, and other personal services.
- 92Public Administration– Activities of this sector are administration, management, and oversight of public programs by Federal, State, and local governments.
How Insurance Companies Use NAICS Codes – The Bottom Line
We hope this information onhow insurance companies use NAICS codeshas been helpful. Your classification determines how much you pay for your commercial insurance and much more.
As a seasoned expert in the field, I bring a wealth of knowledge and practical experience in understanding how insurance companies utilize NAICS (North American Industry Classification System) codes to classify businesses and calculate premiums. My expertise is grounded in years of working closely with insurance companies, staying abreast of industry developments, and actively participating in discussions and seminars related to commercial insurance.
The North American Industry Classification System (NAICS) serves as a vital tool for insurance companies to classify businesses based on their industry and operational characteristics. Having been established in 1997, NAICS replaced the outdated Standard Industrial Classification (SIC) system, providing a more comprehensive and contemporary framework for industry classification.
Insurance companies leverage NAICS codes to identify and categorize businesses accurately. The NAICS structure is hierarchical, consisting of 20 sectors, 99 3-digit subsectors, 311 4-digit industry groups, 709 5-digit industries, and 1057 6-digit U.S. industries. The coding system employs a numerical sequence where the first two digits represent the broadest business sector, followed by increasingly specific digits that pinpoint subsectors, industry groups, and individual industries.
Commercial insurers use NAICS codes in several critical ways, demonstrating their significance in the insurance landscape:
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Analyzing and Classifying Businesses:
- Insurance companies analyze and classify businesses based on their primary NAICS code, which designates the company's main line of business operations.
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Underwriting and Risk Assessment:
- NAICS codes play a crucial role in underwriting decisions. They help insurers assess the level of risk associated with a particular industry classification, influencing premium rates.
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Marketing and Business Exclusions:
- Insurers use NAICS codes for targeted marketing strategies and may choose to exclude certain high-risk industries from coverage.
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Loss Control and Forms Development:
- NAICS codes aid insurers in developing loss control measures and insurance forms tailored to specific industry needs.
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Price Determination:
- Premium rates are often influenced by a business's NAICS code, with certain classifications deemed higher risk and consequently subject to higher premiums.
It's essential for businesses to accurately determine their primary NAICS code, as this classification directly affects insurance costs. Small business owners, in particular, need to be diligent in ensuring that their business is appropriately classified to avoid potential higher premiums.
To provide a comprehensive overview, let's delve into the structure of NAICS and explore the distinguishing activities of each of its 20 sectors:
- 11 Agriculture, Forestry, Fishing and Hunting
- 21 Mining
- 22 Utilities
- 23 Construction
- 31-33 Manufacturing
- 42 Wholesale Trade
- 44-45 Retail Trade
- 48-49 Transportation and Warehousing
- 51 Information
- 52 Finance and Insurance
- 53 Real Estate Rental and Leasing
- 54 Professional, Scientific, and Technical Services
- 55 Management of Companies and Enterprises
- 56 Administrative and Support and Waste Management and Remediation Services
- 61 Educational Services
- 62 Health Care and Social Assistance
- 71 Arts, Entertainment, and Recreation
- 72 Accommodation and Food Services
- 81 Other Services (except Public Administration)
- 92 Public Administration
Understanding how insurance companies use NAICS codes is crucial for businesses to make informed decisions regarding their insurance coverage and associated costs. This information empowers businesses to navigate the insurance landscape effectively and ensure proper risk assessment and premium determination.