Recent studies suggest that patients with type 2 diabetes mellitus are at increased risk of fracture, possibly because hyperinsulinemia is a risk factor for low bone mineral density, which may in turn be a consequence of a lipotoxic effect of visceral and/or intramuscular fat on bone. In the current study, we investigated whether insulin plays a role in cortical bone development by performing a cross-sectional study based on the Avon Longitudinal Study of Parents and Children (ALSPAC), where we examined associations between fasting insulin levels and peripheral quantitative computed tomography (pQCT) parameters as assessed at the mid-tibia in 2784 boys and girls with a mean age 15.5 years. In particular, we wished to examine whether associations that we observed were independent of body composition, including intramuscular fat. We found that insulin was inversely related to cortical bone mineral density (BMD(C)) after adjustment for age and after further adjustment for height, muscle cross-sectional area (MCSA), subcutaneous fat (SAT), and muscle density (MD), which is inversely related to intramuscular fat (-0.018, 95% confidence interval [CI] -0.030, -0.006, p < 0.0001). Insulin was positively related to periosteal circumference (PC) after adjusting for age (0.015, 95% CI 0.003, 0.027, p = 0.015; beta = change per 50% increase in insulin), but this changed to an inverse association after additional adjustment for height and body composition (-0.013, 95% CI -0.022, -0.003, p = 0.008). Path analyses revealed inverse associations between insulin and PC via a direct pathway (-0.012, 95% CI -0.022, -0.003, p = 0.01) and via MD (-0.002, 95% CI -0.004, -0.001, p = 0.0004), and positive associations between insulin and PC via SAT (0.013, 95% CI 0.009, 0.016, p < 0.0001) and MCSA (0.015, 95% CI 0.010, 0.020, p < 0.0001). In conclusion, we found an inverse relationship between insulin and PC via intramuscular fat, suggesting a lipotoxic effect on bone. However, an inverse association between insulin and both PC and BMD(C) persisted after adjusting for all body composition variables, suggesting insulin also acts to inhibit bone development via additional pathways yet to be elucidated.