Off hand I am opposed to literally imprisoning players, but it might be a necessary deterrent. Essentially it would be the same as temporarily banning them from the game for the duration of the prison sentence. If you are trapped in jail with nothing to do then you would just log off until it is over. StarCitizen is planning on this, but they also give people a variety of things to do while in jail (StarCitizen has a huge budget, so they can afford to develop gameplay specifically for jail). Generally I don't like it, but if piracy becomes overwhelming it might be necessary to implement stronger deterrents.
The system I would favor would involve an algorithm that measures the amount of damage a player does when attacking a ship or station. When they attack first and attack a non-criminal target they become criminal and are assigned a bounty proportional to the damage they just did. When a non-criminal attacks a criminal with a bounty they are rewarded money proportional to the damage they do. I assume the game will keep track of who owns each ship, stealing a ship would be possible but difficult to do and would trigger the same bounty effect. If the money paid out is reasonable it wouldn't be profitable in the long term to destroy your friend's ship just to collect his bounty. Though similar to insurance fraud you could still convert a ship into cash by blowing it up. I guess if you have a bounty you can't collect insurance money.