I would rather prefer it to be as following :
On-line races :
Indicators enabled/disabled via server configuration
Off-line races :
Indicators enabled/disabled by user EXCEPT on hot lap mode, where all should be turned off
This way, people would choose the server that fits their skill level the most, and would solve some other trouble as well.
Rather than an indicator of engine damage, I would prefer to see some smoke when the radiator is blown or some analogue effect that would tell me that the thing ain't going fine.
To complete it all, it would be a nice touch if after the race, you would get a report of what has failed or what degree of damage did every/most/most important parts of the car get, to improve people's driving.