In the core of a small transformer there are actually many ( E) and ( I) and different sized steel sheets of large size transformers. In fact, one type of varnish / lamination paint is applied on each of these sheets. Because it does not have the fear of electric short circuit. But the main reason for providing insulation is so that each core can be different. They should not stick to each other. The voltage drop is less as the resistance of their separate cores is much less. If no insulation had been used, all the cores together would have become a larger core and its volume would have increased. As a result, its resistance would be much higher. The result was a lot of voltage and drops. So insulation is used in the transformer to prevent this loss.