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Android ought to update like Chrome: silently downloaded via Wifi (optionally via 3G/4G), installed in the background to whatever extent possible, and then show a reboot prompt only if needed.

Android is a Linux distribution, so most updates ought to be possible without having to reboot the device.

Chrome's auto-updating has broken flash for me several times. The auto-update arrow icon seems to turn from green to red to brown (?), and once it's past green, flash stops working, more or less forcing me to restart it.

It's pretty much the equivalent of forcing a reboot of an OS like Android.

I'm led to believe there's some kind of regulation preventing phones from updating without user intervention, given the 'you will not be able to make emergency calls' prompt most phones seem to show on an update.

No, we're talking about any updates, which is more than most Android phones receive.