Formication is a tactile hallucination that bugs, insects or other small things are crawling on the flesh. It can also sometimes be accompanied by a visual hallucination of insects or like creatures crawling on the flesh. Formication can occur in anyone, but it is often most intense with the abuse of some drugs. If the hallucination is actually believed, it becomes delusionary parasitosis, where not just the perception but the idea of insects or parasites becomes entrenched.
Formication is actually a normal and healthy instinct, in some ways. Insects and arachnids can be a threat both in terms of poisoning and disease vectors, so the instinct to brush away anything resembling an insect from the skin is usually not a problem. I won't deny that I don't sometimes see or feel a piece of lint brushing against me, think it is a spider, and brush it away with a squeal.
In fact, one of the problems with formication (and its related disorder, delusional parasitosis), is summed up in the twin phrases about paranoia: "I'm paranoid, but am I paranoid enough", or "Just because I'm paranoid, doesn't mean they are not out to get me." And to further illustrate, I will tell a story of a little hiking expedition I went on yesterday.
I had spent a day scrambling up and down a scree-filled canyon wall, which had involved getting many burrs and stickers stuck in my clothing. The first few times this happened, I had actually thought, from seeing them out of the corner of my eye, that these were some type of insects. A steep, scree filled slope not being the best place to waste energy with frenetic, disbalancing brushing, I quickly decided to ignore any such small sights and sensations. Later on, when I got home, I brushed a small piece of vegetation out of my hair. And then, about two hours later, I saw a tick, specifically, a dermacentor, hard-bodied, Rocky Mountain Spotted Fever-carrying tick, crawling slowly up my wall in the creepy, deliberate way that ticks have. In other words, when I decided to shut off the part of my brain that was telling me that all the pieces of vegetable matter against my body were parasites, I also shut off the part that told me that a parasite was a parasite. This was, of course, followed by a full reversal where I stared intently at pieces of dust on my floor for signs of movement.
So many people who might have formication might also have real problems with insects. This is especially likely since there are quite a few insects on the planet, and quite a few of those do have an attraction for the human body as a food source. And amongst many of the people who are most prone to formication, there is a lack of cleanliness that would make them a great target for actual insect infestation. Which is not to say that formication can't be diagnosed, but it does make it a bit more confusing for both the person involved and those around them to know when the hallucination ends and reality beings.