What is the mechanism by which corona discharge damages wire insulation?
Insulation is often made from organic polymers. Corona discharge usually signifies ionization of the local gases as well as the ozonation of oxygen. Both of these elements have excess electrons waiting to oxidize the surroundings. Oxidation of polymers causes long-chain polymers to split resulting in cracks in insulation over time.

For the beginning of further reading:
http://en.wikipedia.org/wiki/Polymer_degradation#Ozonolysis

Really this is a physics/chemistry question. I question whether it really belongs in this forum...