Deferred Acquisition Costs - The K-Factor

The K-Factor

Also referred to as KDAC, the K-Factor is basically the percentage of gross profits required to provide for deferred policy acquisition costs. KDAC is: DAC amortization rate = Present value of Deferrable Acquisition Expenses + Accumulated Value of DAC/Present value of Estimated Gross Profits(EGPs) + Accumulated value of Actual Gross Profits(AGPs)

The K-factor can change from year to year due to:

1) The true-up process (replacement of expected values by realized values, i.e. actual historical gross profits (AGP) replace prior estimates of Gross profits (EGP))

2) The dynamical unlocking (replacement of assumptions by experience for the projections of future years)

The DAC is recoverable if the k-factor is less than 100%.

If there is an Unearned Revenue Liability, it may even be recoverable if the K-factor is higher than 100%. If the K-factor is greater than 100% and there is no URL, a portion of the DAC or the total DAC has to be written off immediately, so that the new K-factor is equal 100%.