Not necessarily, they can move to another police department if they get fired for wrongdoing at their current job. This happens frequently. An insurance company underwriting police malpractice policies wouldn't go for that, they would track the officer's claims history and deny coverage (or make it prohibitively expensive), same as if you kept wrecking cars, submitting claims, and switching car insurance companies.

When the state pays directly, there is no incentive for the individual to behave. If the state paid the officer's salary plus a standard 'allowance' equal to the cost of police malpractice insurance for an officer with no claims, then the incentive is to keep their record clean or pay higher rates out of pocket for misbehaviour.