You asked "how" people develop this disorder, and Schatzie gave a good answer as to "why," biochemically, it happens. The how, though, is easier. Once diabetes develops, the irregular levels of blood sugar create many chemical disorders which throw the body off balance. When the body is chronically off-balance, it begins to fall apart. Nerves and nerve sheaths are very sensitive, and tend to go first.
Fortunately, a healthy diet and holistic regimen can reverse diabetes if it is caught early, and slow its progress a great deal in almost all cases. So a careful and dedicated person who takes responsibility for his or her own health can delay neuropathy by decades. And, with proper care, early neuropathy can be reversed, as well. So the "how" is, people with diabetes must take very good care of themselves throughout the day. And, when we don't, neuropathy and other disorders can develop. The longer they go on, the harder they are to reverse.