What map/game settings, if any, exist to get AI to actually build a navy? Please tell me I'm doing something wrong...
I think you're doing something wrong! I've seen the AI (Mongols, I think) build literally over a dozen basic sea units when they had only two cities, which I had to capture with privateers and then allow to be destroyed by even more Mongol sea units. (Better they destroy a captured caravel than my Privateer!)