I think here are some things that collide.
Its not only about lore (losing reputation because you sink with the flag of a Xy). Its also about what makes the game fun and what is bad. Which are extremes, yes.
If you would stick a lvl5 flag back to just get a lvl5 on your ship this would just be cheese.
I could sink my own ship and just burie the flag, than take it back later. Perhaps it could increase the fun for some people, but it would send player the message that you dont need to take a risk.
And there is no way around it like your ship needs to be sunk by another player. Because then you need a foolprove way to say: This ship got sunk by player xy
What is more importend than the lvl 5athena flag? The emissionary quest. Sometimes you get sunk just before you can collect it.
What if you get your flag back, you can exchange it for the quest? Better than nothing!
I would like to see, that you can get the flag back at your ship with lvl1. But... you need to teach the player a new mechanik like: go to your flagbox and but it up.
Also: Any mechanic like this promotes revenge.