Insurance companies face large upfront costs incurred in issuing new business, such as commissions to sales agents, underwriting, bonus interest and other acquisition expenses.
Insurance companies incur large expenses when acquiring new business, but to ensure that they comply with GAAP's matching principle they need to spread out these costs over the period in which revenues are earned.
Establishment of the DAC asset tends to reduce the policy’s first year strain and generally produces a smoother pattern of earnings.
DAC represents the "un-recovered investment" in the policies issued and are therefore capitalized as an intangible asset to match costs with related revenues.
Also referred to as KDAC, the K-factor is basically the percentage of gross profits required to provide for deferred policy acquisition costs.