First speak to your physician overseeing your diabetes and let the Dr. know your are trying to lose weight and having difficulties. Insulin can be an anabolic hormone, but it isn't a steriod. More than likely your Dr. can help you in some way.
Losing bodyfat depends mainly on calories in vs. calories out (Do more and eat less). Being a diabetic definitely makes it more complicated, but you can still lose some bodyfat over time. You have to expend 3500 calories more than you consume to lose one pound of bodyfat, so be patient.