I never insert images as pictures. The JPEG images are only ever used as
backgrounds for frames. I also never open the JPEGs in any picture editing
application and copypaste from there, the images are only ever used as
files from disk.
What I'm doing is precisely this:
File > Insert > Frame... > OK
[right click on the frame created] > Frame... > Background > As: Graphic >
Browse... > [select the JPEG file from disk] > Type: Area > OK
I think, that is the point. You do not insert the image directly, but
use it as background image.
If you insert the image directly, it should stay in JPEG format.
Have you tried, whether other ways to make it a background (e.g.
extending the palette) results in png too?
Why do you try to make it a background of the frame?
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