I think a coach who has retired from actively training in an art himself can still improve as a coach (if not as a practitioner) by using the success of the people he coaches as feedback. Think Angelo Dundee or Cus D'Amato.See every time my coach camps for a fight he brings in guys who can handle him. And will spend 12 weeks getting mauled.
I think after a while of constantly being the best your judgment suffers.
The difference between boxing and some TMAs is that no one promoted the fantasy that Dundee or D'Amato were invincible fighters themselves. (D'Amato never fought professionally and Dundee never fought at all.)
Other than that, I agree. An instructor who never puts himself in a position to lose is hurting his own development. In the long term that will also hurt the development of his students.