What is the problem with the current system? And how would you address?
Sincere question. Just stating that it is all wrong without offering an alternative is not a good idea.
Also please remember, in the end nor the naval, nor the land combat simulation can have a hundred parameter with each soldier/salior being modeled...
Well, insofar as the naval system goes, the problem is manyfold:
1) Because navies can operate indefinitely (and the AI isn't even subject to attrition), the strategic effect of controlling naval bases and coaling ports is essentially nil, making e.g. most of the Pacific completely worthless except for prestige.
2) There is absolutely no real significance to navy composition except that bigger and more modern ship types is better, and it is trivial for any player of a large country to annihilate the Royal Navy in a single war (often easily if you rush ironclads or dreadnoughts before the AI does); the concept of a naval arms race or balance of power isn't reflected in the game at all, and there is no mechanical representation as to why France couldn't simply outbuild Britain's navy.
3) The primary uses of navies are in safeguarding of trade lanes, denial of trade to other powers, and soft power projection. You have some representation of the second with the war exhaustion effect of blockading (but this doesn't reflect land trade routes, trade with neutral powers, and is completely pointless against landlocked foes and unfairly powerful against, e.g., Austria), but this is otherwise unrepresented in the game.
4) Even with the changes in patches and AHD, countries still can and do routinely field navies that are enormously larger than any country ever boasted in real life; a powerful player nation or the UK will not-infrequently boast a navy that would compare favourably with that of every real-world country in the world combined.
5) The extreme changes that the dreadnought (and obsolescence of earlier battleship types) wrought on the scene, and the changes in naval warfare style stemming from the fact that dreadnoughts were obscenely expensive and thus a potentially massive loss in life, prestige, and wealth to any country that risked them in battle, is not reflected in the game in any meaningful way. Nor is the impact of smaller cheaper units such as torpedo boats (and the cost/effectiveness calculations of a small fleet of torpedo boats versus one dreadnought) in the game.
6) Finally, while aircraft carriers can be justified being left out of the game because while they existed their historical impact was minor until the end of the Victoria II period (though there is no reason that HAD to be the case, and any large war in the 1920s could certainly have seen a decisive role for aircraft carriers), submarines were a tremendously effective and potentially decisive weapon of offensive warfare for the latter half of the period and saw action in many conflicts, including of course World War I, so their lack of representation is very bad - though the real problem isn't that submarines aren't a unit, but that at the moment they would be a completely useless unit just as they were in Victoria I because there is no way to represent how they were most effectively used (to attack merchant shipping).
Ultimately, as I noted before, I do not believe combat is or should be a major focus of Victoria II per se; what I would like to see is a naval overhaul focusing more on the soft power and trade interdiction/protection roles of navies. The economy is the centre of Victoria II; the naval role should focus on how it relates to that, especially since that is exactly what was central to the centrepiece conflict of the period, where both Germany and Britain's naval efforts were focused primarily on economic strangulation of the other.