Is the message you are editing plain text or HTML? If it is opening as plain text then you won't get the Insert item on the menu. And you wouldn't be permitted to paste image data.

Ordinarily, I'd advise you to hold down the shift key when clicking Edit As New Message in order to toggle it to the alternative message type. But I have been unable to make this work. It still works with Reply and Forward. I can't be sure if this has ever worked for Edit As New.

You may need to open your old message with Edit As New, use ctrl+a to select all the content, ctrl+c to copy that content, then start a new message (in HTML mode) and paste into that. You'll then have to go back to your image and copy it again. :-(

It might be more efficient to paste your image into a new HTML message, then go back to your "Edit As New" message, select, copy and then paste its content into your new message.

If a message is sent using auto-detect, and there is no need for html, it is converted to text. Then, upon editing as new, it is only text and you cannot paste an image into it as Zenos states. The only solution is to start another message and copy/paste text from the original to a new one. If the original message had a picture in it or used html in some way, the received message when edited as new will show the html bar and pictures can be pasted into it. An exception is if I'm sending the message and make its outgoing delivery format text and html, it will appear in edit as new as html. However, the outgoing format of the copy is changed to autodetect.