Everything You Need To Know About SIC Codes In 2023

TLTR: This article answers the question “what is SIC code?” It explains what use it has for businesses, what benefits it has for insurance companies, and how it’s different from NAICS codes.

When you’re arranging a file of important documents, you might classify them by assigning numbered codes to each category. You might, for instance, assign your family’s medical records a code of 100. Similarly, you might assign your financial accounts a code of 200, and so on.

You could further divide the categories into more specific sub-categories. You might categorize your financial assets as 201 and your liabilities as 202. Or your wife’s medical report as 101 and your son’s report as 102.

The U.S. government uses a similar process to categorize businesses according to the industry they belong to through the means of SIC codes.

What Is SIC Code?

A Standard Industrial Classification (SIC) is a numerical code that was adopted by the U.S. government in 1937. SIC codes also organize industries by their business activities and seek to establish uniformity and comparability in the presentation of statistical data.

Four-digit SIC codes have largely been replaced by six-digit codes called the North American Industry Classification System (NAICS) in 1997. The NAICS code was implemented to standardize the data collection processes between Canada, the U.S., and Mexico, which had entered into the North American Free Trade Agreement (NAFTA).

But NAICS hasn’t been able to fully replace SIC standardized codes. The Security and Exchange Commission (SEC), a major government agency that regulates the market, still uses SIC codes. This is partly because of its long history and also because of the reluctance of businesses that have been using SIC codes since their inception to switch to a new classification system.

For this very reason, private data organizations had to update the SIC system by adding additional classifications. This led to there currently being over 10,000 six-digit SIC codes at the most defined levels.

Note: Six, seven, or eight-digit codes are not official U.S. government SIC codes. They were created by private data companies to help them further classify industries for identification and marketing processes.

While all businesses have one primary SIC code that categorizes the core industry, a single business can have up to five secondary SIC codes.

Secondary SIC codes identify the business’s involvement in other industries that aren’t its primary focus. The secondary industries may or may not be connected to the primary industry.

Note: Most U.S. companies now have both a SIC code and a NAICS code.

What SIC Codes Are Used For?

Governments, lenders, and private businesses use SIC codes to categorize their current and potential customers by industry. These codes are also used to classify companies for tax purposes.

The Bureau of Labor Statistics updates the SIC codes every three years and uses them to create reports on the workforce, wages, and pricing issues.

Financial institutes like banks use SIC codes to promptly identify the industry a company belongs to when deciding whether to extend credit.

The federal government might use the codes to, for instance, compare manufacturing businesses for an economic analysis project.

The first SIC codes were assigned to categorize and analyze the economic activities across multiple industries and government agencies.

It was also intended to encourage a standardized presentation of statistical data collected by various government entities.

Since its inception, SIC has been implemented in various nations, including the U.K.

This code system primarily classifies the industry into 11 divisions:

• Mining
• Services
• Agriculture, forestry, and fishing
• Construction
• Insurance, finance, real estate
• Transportation and public utilities
• Manufacturing
• Retail trade
• Wholesale trade
• Public administration
• Non-classifiable establishments

These are further split into 83 two-digit main groupings, 416 three-digit industry groups, and over 1,000 four-digit industries.

The first two digits of the code represent the major industry group, the third digit represents the industry group, and the fourth digit identifies the specific industry.

For example, if you’re a business who sells home flooring products such as tiles and carpets, the SIC code of your business will start with “57,” which represents retail businesses that sell home goods, which includes flooring. Then, the digit “1” will be added to the number because it’s specific to home furniture and furnishing. Finally, a “3” will be used to complete the SIC code as it categorizes retail stores that sell floor coverings.

What are The Limitations of The SIC Code System

For all its uses, there are certain jarring limitations when it comes to using the SIC system today. Some of these limitations include:

Mistaken classification of employee groups

The system doesn’t take into account the specifics of the employee positions. For example, administrative assistants in the automobile sector serve all levels of the company. Yet the SIC classifies them as “basic sector” manufacturing positions when they should be classified as “non-basic.”

Doesn’t account for modern businesses

SIC codes were developed primarily to cater to traditional industries prior to the 1970s. Since then, businesses have shifted from mainly manufacturing-based to almost equally service-based.

Slow to recognize new industries

As a result of its limitations regarding accounting for modern businesses, SIC has been slow in identifying new and emerging industries, such as those belonging to the computer, software, and IT sectors.

What Is SIC Code in Insurance?

When it comes to insurance, SIC codes are used to define and classify businesses based on the products and services they provide. These codes serve as a valuable tool for insurance providers in assessing the risks associated with their clients.

Say an individual applies for commercial vehicle insurance. In that case, the insurance company may ask them to provide the SIC code for their business to determine if they belong to a high-risk industry. This code will provide the insurance company with information regarding the types of work their employees or drivers are likely to perform, along with the risks they are likely to face while on duty. Carriers can use this information to help determine the premiums.

SIC codes also aid insurers with several analytical processes like underwriting, marketing, exclusions, loss control, pricing, and other related activities.

Insurance companies can use SIC codes to identify potential customers and marketing endeavors. For example, if you want to target potential clients within a specific industry, you can use their SIC codes to quickly determine if they’re a good fit to target.

If an insurance company is looking to conduct a market analysis, it can use the SIC codes to compare your business to a similar business that falls under the same category. Since you’re using SIC codes you can rest assured that you’re comparing businesses under the same industry.

If you’re planning on starting an insurance agency, you’ll need your SIC code to file taxes, and to fill out loan applications and other documentation. You will also need the code if you want to apply for government contracts and loans.

Insurance business fall under the major group “64.” So all types of insurance businesses will start with these two digits. Insurance agents, brokers, information and educational insurance services, and related service businesses fall into SIC code “6411.”

SIC codes have been extended to up to eight digits for more specific classifications within the 6411 category.

Some of the top ways SIC codes are used in insurance are:

Assists in Analytical Processes

SIC codes aid insurers with several analytical processes like underwriting, marketing, exclusions, loss control, pricing, and other related activities.

Identify Potential Customers

Insurance companies can use SIC codes to identify potential customers and marketing endeavors. For example, if you want to target potential clients within a specific industry, you can use their SIC codes to quickly determine if they’re a good fit to target.

Assists in Market Analysis

If an insurance company is looking to conduct a market analysis, you can use the SIC codes to compare your business to a similar business that falls under the same category. Since you’re using SIC, codes you can rest assured that you’re comparing businesses under the same industry.

Assists in Government Regulatory Tasks

If you’re planning on starting an insurance agency, you’ll need your SIC code to file taxes, fill out loan applications, and other documentation. You will also need the code if you’re looking to apply for government contracts and loans.

Insurance business fall under the major group “64”. So all types of insurance businesses will start with these two digits. Insurance agents, brokers, information and educational insurance services, and related service businesses fall into SIC code “6411”.

Note: Insurance companies fall under the major group “63”.

SIC codes have been extended to up to eight digits for more specific classifications within the 6411 categories.

How can insurance companies use SIC codes?

Apart from the uses mentioned, insurance companies can use SIC codes in a variety of ways. Some of the top ways are as follows:

Profitability Analysis

Understanding the scope of competition that a new business might face can help them assess how profitable an insurance business venture is in a particular state or insurance line. You can cluster similar types of insurance companies and conduct a profitability analysis.

Create Targeted Marketing Campaigns

Insurance companies can create targeted marketing campaigns by generating a list of accounts by SIC code groups. Furthermore, they can then create custom marketing campaigns focused on those groups.

Competitive Analysis

Insurance companies can identify the competition in their industry or region by identifying similar companies.

Risk Analysis

By using SIC codes, insurance companies can retrieve information regarding how risky a business or a client is to insure. This can help them establish a premium based on the level of risk the client poses for the business.

What Is the Difference Between SIC Codes and NAICS Codes?

Both SIC codes and NAICS codes serve the same roles. However, they are often used in different manners.

NAICS classifications are more specific compared to SIC classifications. An important distinction between the two code systems is that the American government officially stopped using SIC codes as far back as 1987. It’s only a number of private companies that continue to update the SIC codes.

While private companies have managed to make the SIC codes even more specific than NAICS codes, they are not officially recognized by the U.S. government. Furthermore, the codes themselves may vary between data companies. It can lead to catastrophic errors in data collection and other related services. So, it is recommended for companies to only use the nationally recognized NAICS code for government-related purposes.

Conclusion

A Standard Industrial Classification (SIC) system is used for classifying industries by a four-digit code. Government agencies use it primarily to classify companies according to the industry they belong to. While the SIC code system was replaced by the North American Industry Classification System (NAICS) in 1997, some American government departments still use it to this day.

SIC codes can be of immense value to insurance companies. Apart from helping them identify potential customers, they can also assist them in creating targeted marketing campaigns, help with competitive analysis, and risk analysis activities.

You will also need SIC code to conduct activities like filing taxes, filling out loan applications, and other related documents.

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