Updating Android without Manufacturer support (Not with a custom ROM but with a different approach)
Hot flashing is certainly possible, though harder than it's worth.


  AFAIK all data on the phone, including the drivers get deleted if I flash a custom ROM (eg. Stock Android 7.0 or LineageOS)


That's not correct.  Data only gets wiped if the flashing script does so or if the device is encrypted.  Likewise, firmware only gets overrwritten/wiped if the flashing script does so.

If you're not flashing a stock ROM from the manufacturer (or vanilla Android on a Nexus/Pixel phone), then you're flashing a custom ROM.  This approach is not going to gain you anything really, except on a device with a very very tightly locked bootloader.