Diffusion works well for small insects, but not for large ones. The further oxygen has to travel by diffusion, the slower it travels. That means that the cells of bigger animals relying on diffusion may suffocate. Oxygen cannot reach them at a rate that keeps with pace with their needs.
Evolution cannot get around the physics of diffusion rates, and insects cannot simply throw off the respiration system they’ve inherited from their ancestors. Together, these two factors constrain the body sizes that insects can evolve. Animals that started to push the size limit set by diffusion rates would not have been able to supply their cells with sufficient oxygen, and therefore would not have been very successful.