Also realistic. I like it that way.

Using the external view (F12) to get close to the ship and look at the flag.

I used the file (I can't play right now and don't remember which one; someone will know) to change the renown for neutrals to '0'. I never attack them when they're alone, and in convoys that way I don't get punished for them, but don't get credit either.

Depending on weather 700 - 800 is about right at night but can be as low as 600 in some cases.
When strong light source (moon, bright sky, burning ships, searchlights) are from other side of ship it's especially difficult.

I found that raising periscope view towards the sky so flag is then positioned low in the screen gives extra light.
You can cheat somewhat by pausing action & raising gamma using monitor control buttons which ruins the on screen atmosphere but often reveals flags in poor light conditions. I look for an overall red color coupled with position ... eg near England or in an escorted convoy so logically those 2 factors identify it as British merchant even if you cant make out the flag details precisely.