That must be a Mac - us PC owners don't get all those options!
That is an "attachment" rather than an "inserted" image - I guess it works but not in the way I would want.
Hmm. can't preview the post so I guess I will have to post and see whether this works ...
edited to add:
... yes, but all the images are appended to the end of the post which is very different to being able to insert images into the post itself, to do that you need to use the insert image editor button which requires an URL.