Did a little more exploring. So both Chrome and Edge do not upload an image using the "Insert Image" icon - neither insert the image inline nor list/show the file attachment in Manage Attachments.

Both Firefox and Brave browsers successfully insert the image, and the image file appears in the Manage Attachments list.

For me, at least, it looks like a browser issue rather than a VBulletin issue. Edge was updated last week to Version 91.0.864.37 and probably inspired this problem.