No, you don't *need* a physical server. Yes, you point the MX record at the Microsoft 365 servers...But there is a whole lot more to it than that.
When you buy into Microsoft 365 Business, you are buying a 'tenancy,' on Microsoft servers in Microsoft data centres, ready built to deliver identifable services to end users. It's not a million miles away from renting your own Windows VPS farm, installing Active Directory and server application software, then having a dev-ops team spend a couple years creating a web portal to integrate it all. You don't lose low-level access though as PowerShell still works. The service is extremely scalable from sole proprietor to large corporation.
One of the identifiable services is e-mail, sold to end users as an Exchange mailbox. However, don't lose sight of what you are actually buying, access to an Exchange server with (virtually) the same functionality you would have running your own Exchange server.
Another identifiable service is file sharing, in the form of OneDrive and SharePoint. Not perfect by any means but included in the subscription at no extra cost. Yes, you can have a folder structure. Granular permissions, not so much. For a 5 seat company it may be appropriate to simply dedicate a OneDrive account and share the signon credentials. End users mapping drives directly to VPN/NAS turns out to be, not that useful, not that reliable and less secure in practice.
Comes down to what they think they need. With respect to the insurance policy, I would think self-encrypting file-systems are more of a priority than a NAS. Does everyone have a device which supports BitLocker and is it turned on?
A dispersed 5 seat start up should be embracing Cloud First,
IMO. By which I mean forget everything you think you know and turn the on-premises model on it's head. There is no central office, there is no comms room, there is no permiter, there is no IT department on the payroll. For instance, don't save to a NAS and back the NAS up to the Cloud. Save to the Cloud and back the Cloud presence up to a NAS instead.
My smallest 365 customers don't own anything as expensive as a NAS, even though I might like them to. All my 365 Business customers are subject to GDPR and a few have the more stringent compliance requirements of UKAS, FRC, SRA to worry about. Small companies servicing Government contracts may need Cyber Essentials certification and even if they don't, the checklist is a good place for any small business to start.