NAICS vs. SIC Codes: How Are They Different?

Even with a plethora of industry jargon you can come across in the business world, you never know when your knowledge may get tested. For anyone looking to buy insurance or work as an insurance professional, two terms that come up a lot but are quite mysterious are SIC and NAICS codes. These two concepts constantly work in the background but are still overt terms that drive day-to-day businesses.

So, let’s review what SIC and NAICS codes are.

What are SIC Codes?

SIC, or Standard Industrial Certification Code, is a numerical code adopted by the U.S. government in 1937 to make it easier for American businesses to compare their economy with Canada more easily. SIC Codes organize industries by their business activities, making it more uniform and easier to compare statistical data.

Although it’s still widely used, the SIC hasn’t been updated since 1987. Each four-digit SIC code follows a specific formula. The first two digits identify the major industry where a business earns most of its revenue. The third digit further identifies the industry subgroup a company falls under, and the fourth digit identifies the specific industry sector in which the business operates.

What does a SIC Code do?

SIC codes add structure and clarity to an already vast and multifaceted economy. Apart from that, SIC codes can:

• Allow federal or state agencies to track for government statistical purposes.
• Classify markets for professional use or identify key competitors in both public and private markets.
• Pinpoint businesses eligible for government contracts.
• Create a straightforward way to collect, analyze and report economic metrics.
• Successfully complete relevant forms and applications.

What are NAICS Codes?

NAICS, or The North American Industry Classification System, took over from the SIC in 1997, developed jointly by the U.S., Canada, and Mexico to make better statistical business comparisons between the three countries. NAICS codes are official codes used by the U.S. government and internationally.

The NAICS focuses on business processes rather than the end products, capturing several service industries currently underrepresented in the SIC system. While the system was primarily developed for statistical analysis, various government agencies, trade associations, and regulatory bodies have implemented the NAICS system for internal needs.

Companies rely on the NAICS codes to classify their customers by industry. Several businesses prefer to align their marketing efforts with a particular NAICS code. It allows them to focus their marketing efforts on companies in similar or identical industries. Getting NAICS codes allows them to build a stronger understanding of their ideal customers and industries they can most benefit from.

How are NAICS and SIC Codes Used?

Both NAICS and SIC codes help you find information about industries in business databases and directories. You can use the codes to:

• Identify the lines of business of a company
• Identify competitors within the industry
• Locate and compare industry ratios with your company’s ratios
• Generate company listings within an industry
• Find articles and current news about an industry.

NAICS vs SIC: What’s the Difference?

NAICS codes (6 digits) have all but replaced SIC (4 digits) codes. The former is more flexible and can expand to include additional major industry sectors. While some companies and agencies still use SIC codes, you can review the directory to determine which best describes your company’s primary business activities.

After decades of additions and updates, the SIC system did not meet modern standards and requirements, further boosting the need and use of the NAICS. NAICS is a more detailed, standardized, and up-to-date system that uses a purely production-oriented structure to identify businesses only by their primary economic activities. The SIC system moves from product-oriented logic to market-focused logic, making it prone to inconsistencies resulting from its many revisions throughout the years.

Let’s dive into it further.

NAICS is an industry classification system, not a product classification system. It classifies all economic activities into 20 sectors: five good-producing sectors and 15 service sectors, all using six-digit codes. Here’s what each digit designates:

Conversely, the SIC classifies all industry and service types into 10 broad divisions (01 to 91). The original code only had four digits.

For example, book printing is grouped under SIC 2732; 27 denotes Print and Publishing, and 32 represents “book printing.”

The NAICS groups organizations into industries based on the likeness of the goods or services generation process. Unlike SIC codes, NAICS codes are based on stable economic models. Hence, with NAICS codes, companies that use the same or similar production processes are grouped together. With SIC codes, industries were generally grouped based on either demand or production.

The NAICS isn’t just used for statistical purposes. It is also utilized for administrative, regulatory, contracting, and taxation purposes. Some state governments also offer tax incentives to companies classified in specific NAICS industries.

NAICS codes, unlike SIC codes, were developed in cooperation with Canadian and Mexican statistical agencies. Since both countries classify industries using the NAICS, the government and business analysts can directly compare the industrial production data collected and published between the three countries.

Other Industry Classification Systems

There are several other nation-based and organization-based systems. For instance,

• The SEMI Industrial Classification System is a product classification system for suppliers that support various industry segments represented by the SEMI Trade Association.
• GICS, the Global Industry Classification Standard, is the industry classification structure used for S&P’s U.S. industry index calculations.
• NAICS also aids comparability with the International Standard Industry Classification (ISIC) system, developed and maintained by the United Nations.

If you are an insurance agent, comprehending NAICS and SIC codes is crucial. As these codes classify businesses and industries based on their primary activities, insurance agents can effectively target specific markets. By understanding the nature of companies within these codes, insurance agents can tailor their marketing strategies to address the unique insurance needs of each industry.
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