First you must understand that the goal of electricity is to find the ground. It will follow the path of least resistance to get there.
While the squirrels are "walking the power lines" the electrical current flows through the insulated wires as detouring through the animals would cost rather than conserve energy. It is only when the little beasts are touching the wire and, say a power pole that they complete the circuit and allows the electricity to flow to the ground in a shorter path than continuing across the wires, through the substation into your house and to the ground.
I kind of understood that but they have to touch both every time they get on the wire don't they? Or do they climb to the top of the pole and leap to the wire without touching both at the same time?
I suspect that it's because of the insulation you mentioned that they don't get shocked every time