Okay. I,ve had the time to single player and multiplayer test insignia's now. (Default and Custom ones)
Regardless of file format, anything that is NOT 128x128 does not show in the interface. It will show on the model.
This is really relevant if you plan on making a logo that has fine values, requiring a higher resolution. Example of this would be the Suicide Kings Insignia. Using an actual scan of the card, finer lines on the card begin getting lost at 256x256. (Texturing wise, I can understand the argument that 128x128 could be considered too large. However a properly made DDS file only consumes as much space as the filesize. No mip maps at 128^2 w/Alpha is 16kb vs 11kb for 8bit Indexed PCX, so it is only expensive depending on compression type, image size and if it has mip maps.)
And even with the closest possible zoom, which isn't very close, it still becomes obvious. And who's to say Insignia only need to be applied to Fighters/Bombers? Yes, there is or will soon be a functional Texture Replacement function in the code. Doesn't nullify or negate the usability of Insignia on any number of ships for even more visual variety.
There is also no universal insignia scale-to-model for placement amongst the models. So different models could be scaling it at separate sizes. For a DDS image, this would be great if it would utilize the mip-maps, but it doesn't.
Also, zero documentation (that I can find) as to how to implement custom insignia without replacing existing insignia.
And the largest part: In single player, when using a ship that DOES display Squad Insignia, with it defined in the mission (as outlined in it's usage in the original

missions), it still does not display. This is also regardless of image format, even though the mission file explicitly calls to the .pcx filename and again, no documention regarding wether or not that field will accept different extensions other than PCX there.
I thing utilizing an insignia.tbl or squadron.tbl that can be expanded via TBM and used either in mission headers or via #Wing sections would be handy.