Well, the first question you already answered. Notice how you used a character that wasn't "y"? There are a blue billion ways players can change the word they type that it would be completely infeasible to try and handle all variations of it and replace it with another word or phrase.
There's of course going to be the follow-up question "so then why not just do it for the base version of the word?". To which I have to say; "If you give a mouse a cookie..." - if you do it for one instance of the behavior, you will inevitably be held to do the same for every other conceivable instance.
what is the difference between the "insults" and the "hatespeech" report option?
if someone uses hatespeech OR insults shouldnt both report options do the same?
The difference between insults and hate speech is that hate speech is an attack on an unchangeable factor of character. A mental illness, ethnicity, gender, sexuality, etc., and these types of attacks are something Riot doesn't want in their game, period. Of course, they don't want any sort of insults and misbehavior in their game, but they hold a special scrutiny for hate speech.
Consequently, no; the two report options are not the same and should not do the same thing. Verbal abuse and insults fall under the Harassment/Verbal Abuse report option, and put players on the basic, mainline punishment track. Hate Speech covers egregious offenses such as encouraging self-harm and the aforementioned hate speech, which Riot treats with zero tolerance, and results in verified offenses leading to higher levels of immediate penalty (14-day ban for a first offense).
