We identify the need for a theory of demand for health insurance suited to the informal sector in low-and middle income countries (LMIC) where some 3 billion people lack health cover. Excluded from formal governance structures, they rely on informal arrangements by which rules-in-use shape choices, behaviours and decisions. We explore the fundamental assumptions of standard economic theories of demand for health insurance in the light of arguments from the literature and field evidence. We show that the assumptions are largely inconsistent with the context of poverty and informality. And we propose a new theory based on assumptions better suited to the context of informality and poverty. Our major conclusion is that, in order to grow the demand for health insurance in the informal sector in LMIC, it is first necessary to strengthen ground-up governance consistent with group-based decision-making under local conditions. The Geneva Papers (2014) 0, 1–19. doi:10.1057/gpp.2014.24