Your ship shows damage as you are taking it. I presume when you respawn on higher than normal mode, it does so just as it would on normal, with not a scratch on it. If there is actual damage still on it after respawning, it should use the same graphical calculation of damage as it would in battle.
I believe many people had wanted such persistent damage, but it would involve new texturing on every ship and would require several layers of the texture to grow and change based on certain types of damage. It's just a lot of work for a cosmetic option that doesn't impact the majority of gamers or gameplay.