@ Otto: One cannot say they want immersion and then complain about seeing something that actually flew from these ships. Keep the flag.
On the other hand, I like the Up/Down that Anvart created for SH3, because they normally didn't fly the flag while out on patrol. In a crash-dive situation the flag would be left to fend for itself, and they didn't risk that. Normally the flag was only flown when entering or leaving harbor, or to identify your sub to friendly ships.
Just my opinion, of course.