Yes. Insulation. It is critical the heavy power wires do not contact body metal. Shorting a battery to ground will cause a very high amperage discharge.
Chicken or egg question.
As long as the plastic doesn't get above its transition temperation everything is fine.
Two possibilities:
1. Either high current (40 amps or more) heated the plastic and the meter was no longer tight to the dash housing. This allowed the nut holding the red wire to get slightly loose. Slightly loose connection resulted in overheated crimp on the red wire's ring terminal.
OR the reverse. The red wire's ring terminal connection got overheated from high current and that heat caused the ammeters insulating block to get soft....
2. The metal to metal press fit connection between the ammeter's studs and metal plate got loose. This causes a poor connection in the meter assembly and it gets hot. The heat makes the press fit even worse....
There is always some sort of insulating material. I haven't looked at enough ammeters used other years and by other manufacturers to guess as to why this method of assembly was used.
Yes.
Its really important the studs are tight in the metal plate.
Some people have reinforced the stud connections.