TLDR
- The 2022 update to the NAICS system introduces enhancements that more accurately reflect the evolving business landscape, with significant impacts on the retail and information sectors.
- However, despite these advancements, the system still faces challenges, notably when businesses with vastly different risk profiles fall under the same NAICS code.
- BusinessMatch addresses these issues by offering accurate business tags, derived by distilling vast amounts of structured and unstructured data into descriptive tags, ensuring a more nuanced and precise classification beyond the limitations of NAICS.
- Additionally, the IndustryGuard feature adeptly detects misrepresented businesses, enabling risk underwriters to deflect non-viable loans and insurance policies earlier in the screening process.
Navigating the intricate and dynamic landscape of the North American economy requires a robust framework for classifying businesses. The North American Industry Classification System (NAICS) has traditionally been this guiding structure. However, as businesses diversify and evolve, the constraints of this system become more apparent. For commercial risk underwriters, grasping these subtleties is essential, especially as industries exhibit varied risk profiles across economic cycles. Let's dive deeper.
A Brief Introduction to NAICS
Established in 1997, the NAICS system offers a consistent framework for collecting, analyzing, and disseminating industrial statistics, serving government analysts, researchers, academics, and businesses. Updated every five years, it captures the pulse of the evolving North American economy. About 70 years earlier, the Standard Industrial Classification (SIC) system was the standard. While both classify industries, the SIC system classifies businesses based on their primary activity and is more production-oriented, while the NAICS system considers both primary and secondary activities of establishments and emphasizes the processes used to create products and services.
NAICS 2022 vs. NAICS 2017: A Risk Underwriting Perspective on Key Changes
The transition from NAICS 2017 to NAICS 2022 brought about significant shifts, with the most pronounced changes being in the Retail and Information sectors.
Retail Sector: A Shift in Classification Paradigm
Historically, the NAICS system categorized retail businesses by their sales method, differentiating between online and brick-and-mortar stores. However, NAICS 2022 has shifted its emphasis from sales methods to the nature of the products or services offered. This led to the deprecation of codes such as 454110 and 454390. A notable change for risk underwriters is the merging of traditional tobacco stores (formerly under 453991) and e-cigarette vendors (previously 453998) into a single code, 459991, designated for Tobacco, Electronic Cigarette, and Other Smoking Supplies Retailers. This consolidation highlights the varied risk profiles of these retailers and is poised to impact risk assessment due to the inherent differences between traditional tobacco sellers and e-cigarette vendors.
Information Sector: Content Over Medium
In a shift parallel to the Retail sector's evolution, the Information sector has redefined its classification criteria. The focus has transitioned from the medium of publication, whether online or print, to the nature of the content. As a result, the code 519130 - Internet Publishing and Broadcasting and Web Search Portals has been deprecated. Now, businesses are categorized by their content and underlying business model, not by their distribution methods. This adjustment highlights the converging realms of online and offline publishing in today's digital age.
The Road Ahead
The updates in NAICS 2022, while capturing the dynamism of the business environment, introduce new challenges for risk underwriters. As industries undergo reclassification, grasping the subtleties of these shifts is vital for precise risk evaluation. Stay connected for our subsequent blog post, where we'll explore further the nuances of NAICS 2022 and its ramifications for risk underwriting. As the landscape of business classification transforms, our comprehension and strategies must adapt in tandem.
Beyond NAICS: The Challenge of Multi-faceted Businesses
While the NAICS system provides a detailed classification, it can fall short in capturing the full scope of a business's operations, especially when entities within a single NAICS code exhibit varied risk dynamics. Take the 2022 NAICS update as an example. It aimed to improve the classification of cannabis businesses, which were previously categorized under 446110 - Pharmacies and Drug Stores in the 2017 version. Yet, challenges persist. Smoke shops that retail vapes, for instance, encounter distinct risks compared to those that don't, largely due to the fluctuating legal landscape surrounding vape sales. Another notable issue is the grouping of single-family residential remodelers and home flippers under NAICS 2366118. Risk underwriters often find this generalization problematic, seeking a more nuanced differentiation between these entities because of their differing risk profiles.
BusinessMatch: Elevating Business Classification
In commercial underwriting, different organizations have varying risk appetites, influenced by their operational structure. Many seek to limit exposure to specific industries, be it for risk management or regulatory compliance. As a result, commercial underwriters prioritize efficient methods to filter applications early in their customer’s journey, minimizing resource expenditure. Traditionally, this has been achieved through a combination of fixed and dynamic rules, emphasizing the importance of accessing high-quality data, like precise industry codes and business descriptions, early in the screening process. Livesight has crafted solutions addressing these nuances that go beyond the confines of the NAICS system. By appending descriptive tags to businesses, we provide a richer perspective on each entity. Whether it's identifying a vape-focused smoke shop or tagging an entity as a "Home Flipper", we facilitate nuanced risk assessments. Our approach is deeply anchored in data. Drawing from a plethora of public and proprietary sources and utilizing cutting-edge language models, we distill vast amounts of structured and unstructured data into actionable insights. This includes precise industry codes, descriptive tags, and risk indicators, offering a holistic view of a business's operations.
IndustryGuard: Deflect Misrepresentation Earlier In the Funnel
As highlighted, enhancing commercial underwriting funnels often involves implementing fixed and dynamic rules, especially during initial screenings to weed out non-viable loans and insurance policies. Yet, the modern era presents a challenge: businesses intentionally misrepresenting their nature to sidestep these preliminary filters. IndustryGuard is BusinessMatch’s answer to this challenge. Harnessing sophisticated fuzzy matching algorithms, it adeptly identifies potential business misrepresentations, even when faced with partial or distorted data. A prevalent example is seen from the cannabis sector.
In Conclusion
The NAICS system, with its recent enhancements in the 2022 update, continues to be a pivotal tool for classifying businesses in our ever-evolving economic landscape. However, its inherent limitations, especially in capturing the multifaceted nature of modern businesses, underscore the need for more nuanced solutions. BusinessMatch bridges this gap, offering a refined and cost-effective approach to business classification that addresses the system's shortcomings. Contact us for a free trial and discover how you can elevate your business intelligence process with unrivaled matching performance and high-quality data.
