Have YOU talked to her about how you feel? Getting information second-hand (hearing about how you feel from him) isn't always the most productive. She could be thinking that he is just saying that and that it isn't really how you feel about her. While I understand not wanting to be too confrontational, I think sitting down and having a conversation about it with HER is important. Tell her what you just told us - you really care about her as a friend, but you just don't feel that romantic and/or sexual spark.
Her insecurity is something she needs to work on if she is going to be a part of any sort of open or poly relationship. Probably not something that would be well received from you, but you might encourage your SO to talk to her about it so that she can work on being happy for him and finding her own relationship(s), too.
The other issue is if they went into the situation expecting to form a triad. If they've agreed to ONLY be part of that relationship structure, then she may very well have an issue with you and him having a relationship without her. There are all kinds of issues about trying to force people into a certain configuration, but some people are bound-and-determined to do it and she may very well be one of those people if she had that notion of polyamory when they chose to pursue it.