Dynamic keyword insertion (aka, DKI) is an advanced AdWords feature that allows advertisers to dynamically replace the insertion code in the ad by the word in the advertiser’s list that triggered the ad (not the words used by the user in his search query).
The insertion code :
The insertion code can be inserted at any point in the ad (headline, description lines and display or destination URL) and works for search and display network.
If the advertiser’s keyword triggered by the search query is too long to be inserted, AdWords will utilize the default text instead.
Dynamic keyword insertion can be useful for creating relevant ads but it may be sometimes dangerous and can’t substitute for human tuning.
A video tutorial about dynamic keyword insertion: