Unpacking the Opportunities and Challenges of NAICS 2022
The North American Industry Classification System (NAICS) is revised every five years, and the 2022 update brings several significant changes. NAICS 2022 presents a set of logical and well-received modifications. However, some of these adjustments also pose new challenges in risk assessment. As commercial lenders and insurers adapt to the updated classification system, understanding its nuances is crucial for effective risk profiling. In this article, we'll delve into the main differences between NAICS 2017 and NAICS 2022, emphasizing their impact on the risk underwriting process.
Highlights
The most significant revisions primarily appear in the Retail, Information, and Manufacturing sectors. These modifications predominantly center around consolidation and the reclassification of businesses based on the products and services they provide, rather than their delivery method:
- Retail codes have shifted their focus exclusively to the products being sold, moving away from the method of retailing. A notable change is the consolidation of all tobacco product retailers, including e-cigarettes, under one code.
- Mirroring the retail changes, the Information sector emphasizes the content businesses produce over the medium of publication, such as online versus print. For instance, online book publishers are now classified under "Book Publisher.
- NAICS 2022 has merged codes that previously differentiated manufacturing or retail businesses based on gender or age. Businesses are now classified more by the nature of their product
With web presence becoming pivotal for business success, the distinction between brick-and-mortar and online stores is diminishing. This evolution means delivery methods are becoming less crucial in assessing business risks, with the actual offerings (products & services) emerging as the primary risk determinants—a change that is widely seen as positive. However, some consolidations, like merging tobacco stores with e-cigarette shops, may not be ideal for risk assessment. For instance, e-cigarette sales face varied jurisdictional regulations, making businesses offering these products potentially riskier compared to traditional tobacco stores. Livesight BusinessMatch assists commercial risk underwriters in distinguishing between these varied business types through additional data points such as BusinessTags or IndustryGuard.
Deep Dive Analysis
Let's dive deeper into the nuanced changes across various sectors. To start, several sectors remained largely unchanged, including:
- 11 - Agriculture, Forestry, Fishing and Hunting
- 22 - Utilities
- 23 - Construction
- 48-49 - Transportation and Warehousing
- 53 - Real Estate and 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
- 92 - Public Administration
Next, we'll examine sectors that experienced significant revisions. These changes are categorized into three color-coded groups for clarity:
- Red: Changes necessitating additional risk underwriting due diligence.
- Green: Changes perceived as directly enhancing the risk underwriting process.
- Yellow: Changes with mixed implications for risk underwriting.
21 - Mining, Quarrying, and Oil and Gas Extraction (red)
Most changes in this sector were subtle, primarily consolidating several NAICS 2017 codes into fewer categories. For example, the 2017 codes 212221 - Gold Ore Mining and 212222 - Silver Ore Mining have been combined into a single 2022 code: 212220 - Gold Ore and Silver Ore Mining. Although both gold and silver ore mining businesses fall under the umbrella of precious metal extraction, they are subject to distinct market dynamics and cost structures. Consequently, underwriters may require additional layers of due diligence when assessing these businesses.
31-33 - Manufacturing (green)
The manufacturing sector underwent numerous changes in the NAICS 2022 update. A notable shift was the consolidation of less frequently used codes into broader categories. For instance, the 2017 codes 315110 - Hosiery and Sock Mills and 315190 - Other Apparel Knitting Mills have been unified under the 2022 code, 315120 - Apparel Knitting Mills. Such consolidations are generally viewed positively, given the inherent similarities between these businesses in terms of market demand, regulatory challenges, competition, and technological advancements.
Another significant and welcomed change in the 2022 NAICS iteration is the elimination of codes based on gender or age distinctions. Previously, determining whether a manufacturer primarily produced men's or women's clothing could be both challenging and, at times, unnecessary. Modern businesses are shifting their focus from categorizing consumers strictly by age or gender to a more holistic approach centered on interests and behaviors. The revised NAICS codes align with this evolved perspective on market segmentation.
42 - Wholesale Trade (green)
The Wholesale Trade sector experienced only a few modifications. The primary change aligns with the trends observed in the Retail and Manufacturing sectors: the elimination of codes that differentiated businesses based on gender or age.
44 - 45 Retail Trade (yellow)
The Retail Trade sector saw extensive revisions from its 2017 codes in the 2022 update, largely driven by the removal of codes associated with sales channels and delivery methods. The 2022 version centers primarily on the nature of the products sold.
For instance, the 2017 codes 454110 - Electronic Shopping and Mail-Order Houses and 454390 - Other Direct Selling Establishments have been phased out. Previously, these codes emphasized the retailing method over the actual products sold. Now, businesses that fell under these classifications are categorized by the products they offer. This shift mirrors the evolving retail landscape, where the lines between online and brick-and-mortar stores are increasingly blurred. By prioritizing the nature of products or services over the method of sale, the new system offers a clearer and more relevant view of industry dynamics. However, this transition does introduce challenges, especially when mapping from 2017 to 2022 due to the one-to-many relationships in some classifications.
Furthermore, NAICS 2022 introduced a comprehensive code, 459991 - Tobacco, Electronic Cigarette, and Other Smoking Supplies Retailers, which covers all tobacco-related products, including vapes and e-cigarettes. In contrast, NAICS 2017 had a distinct code for Tobacco Stores (453991) and categorized e-cigarette and vape products under All Other Miscellaneous Store Retailers (453998). While this consolidation might seem like a logical step, it introduces new challenges for risk assessment. E-cigarette sales, for instance, are subject to diverse regulations across different jurisdictions and therefore stores offering these products are often deemed riskier compared to traditional tobacco stores. Livesight’s BusinessMatch assists commercial risk underwriters in distinguishing between these different business types through the use of BusinessTags.
51 - Information (green)
A primary shift in the Information sector is the removal of 519130 - Internet Publishing and Broadcasting and Web Search Portals. In the NAICS 2017 framework, an online book publisher might have been categorized under this code. However, with the 2022 update, such a business would be classified by its core activity, falling under 513130 - Book Publisher.
Additionally, the sector has introduced a comprehensive code, 516210 - Media Streaming Distribution Services, Social Networks, and Other Media Networks and Content Providers. This code amalgamates businesses from several 2017 classifications, including 519130 Internet Publishing and Broadcasting and Web Search Portals, 515111 - Radio Networks, 515120 - Television Networks, 515210 - Cable and Other Subscription Programming, and 519110 - News Syndicates.
Another change in this sector differentiates between large-scale telecommunication service providers and smaller entities that function as agents. The new code that likely will be widely used is 517122 - Agents for Wireless Telecommunications Services.
The restructuring of the Information sector in NAICS 2022 offers a more precise and relevant classification system. By categorizing businesses based on the nature of their content or services, underwriters are enabled to have a more accurate assessment of industry-specific risks and exposures
52 - Finance and Insurance (green)
The Finance and Insurance sector saw minor changes, primarily consolidating several less frequently used codes into broader categories. For instance, the 2017 codes 522120 - Savings Institutions and 522190 - Other Depository Credit Intermediation have been merged to form a single 2022 code, 522180 - Savings Institutions and Other Depository Credit Intermediation.
Both of these types of business deal with deposit acceptance and credit provision, exposing them to similar financial and operational risks. Their shared regulatory environment, sensitivity to economic conditions, and customer base further align their risk profiles from a risk underwriting perspective.
81 - Other Services, except Public Administration (green)
This sector experienced minor revisions, primarily consolidating several infrequently used codes into broader categories that will help in simplifying and streamlining the classification process.
Mapping from NAICS 2017 to NAICS 2022
Transitioning from the 2017 to the 2022 system can be optimized to minimize the effort required to reclassify businesses. The majority of updates allow for a direct mapping from a 2017 NAICS code to its 2022 counterpart, either through a 1:1 mapping or by consolidating several 2017 codes into a single 2022 code (many:1). However, certain updates involve dividing a single 2017 NAICS code into multiple 2022 codes (1:many). In such cases, additional data is required to accurately determine a business's operations and assign the appropriate 2022 NAICS code.
The following 2017 codes are posing the most significant challenges when transitioning to their 2022 equivalents:
- 454110 - Electronic Shopping and Mail-Order Houses
- 454390 - Other Direct Selling Establishments
- 453998 - All Other Miscellaneous Store Retailers
- 519130 - Internet Publishers and Broadcasting and Web Search Portals
- 517312 - Wireless Telecommunications Carriers (except Satellite)
- 517911 - Telecommunications Resellers
To navigate these complexities, one might resort to mapping to generic 2022 codes (e.g., 459999 - All Other Miscellaneous Retailers). Alternatively, a specialized process or tool might be necessary to identify a new code, relying on additional data points specific to individual businesses.
Final Word
The changes introduced by the Economic Classification Policy Committee are largely viewed as logical and forward-thinking. However, as highlighted earlier, certain modifications pose challenges in categorizing businesses based on their risk profiles. Livesight’s BusinessMatch utilizes an extensive array of data vectors, including business tags, descriptions, social media insights, licensing data, and many more, to assist commercial risk underwriters in navigating this transition seamlessly. Importantly, BusinessMatch maintains backward compatibility, supporting both NAICS 2017 and NAICS 2022.
For a deeper dive into all the modifications, we recommend consulting the 2022 NAICS manual available at https://www.census.gov/naics/. From page 605 onward, the appendices provide detailed tables and mappings that highlights the distinctions between the NAICS 2017 and 2022 versions.
