During insect development, morphological differences between segments are controlled by the Hox gene family of transcription factors. Recent evidence also suggests that variation in the regulatory elements of these genes and their downstream targets underlies the evolution of several segment-specific morphological traits. This review introduces a new model system, the larval oenocyte, for studying the evolution of fate specification by Hox genes at single-cell resolution. Oenocytes are found in a wide range of insects, including species using both the short and the long germ modes of development. Recent progress in our understanding of the genetics and cell biology of oenocyte development in the fruitfly Drosophila melanogaster is discussed. In the D. melanogaster embryo, the formation of this cell type is restricted to the first 7 abdominal segments and is under Hox gene control. Oenocytes delaminate from the dorsal ectoderm of A1-A7 in response to an induction that involves the epidermal growth factor receptor (EGFR) signalling pathway. Although the receptor itself is required in the presumptive oenocytes, its ligand Spitz (Spi) is secreted by a neighbouring chordotonal organ precursor (COP). Thus, in dorsal regions, local signalling from this component of the developing peripheral nervous system induces the formation of oenocytes. In contrast, in lateral regions of the ectoderm, Spi signal from a different COP induces the formation of secondary COPs in a homeogenetic manner. This dorsoventral difference in the fate induced by Spi ligand is controlled by a prepattern in the responding ectoderm that requires the Spalt (Sal) transcription factor. Sal protein is expressed in the dorsal but not lateral ectoderm and acts as a competence modifier to bias the response to Spi ligand in favour of the oenocyte fate. We discuss a recently proposed model that integrates the roles of Sal and the EGFR pathway in oenocyte/chordotonal organ induction. This model should provide a useful starting point for future comparative studies of these ectodermal derivatives in other insects.