There's no in-universe description of the Cove's history, but we do get this snippet in the press-kit that was released in advance of the film. In short it would appear that pirates who've passed their sell-by dates can retire to the island. When they do so, they shove their (now unneeded) ships into the Shipwreck Cove.
The last of the fabulous sets built on Disney’s Stage 2 for the “Pirates” trilogy was Shipwreck Cove, where the raucous and divisive Brethren Court of Pirate Lords meets to make a last plan of action against the onslaughts of Beckett and the East India Trading Company armada. “Shipwreck Cove was conceived by Gore as kind of a retirement home for old pirates, comprised of the wrecked hulls of various ships hidden in a volcano,” notes Heinrichs. “The Brethren Court meet in one of those hulls, and outside of the structure we’ve extended the set with a 300-foot-long painted backing which has been beautifully
designed and painted in the good, old-fashioned Hollywood tradition.”
The Brethren Court does have some foundation in history, note the screenwriters. “There was a loose confederation of pirates called the Brethren of the Coast,” says Ted Elliott. “And it’s just such a fun idea to have a whole bunch of pirates sitting around trying to come to decisions. Captain Sao Feng has a line of dialogue in which he says that pirates are either captain or crew, and nine captains charting a course is eight captains too many. We also wanted to get more international in flavor, so the Pirate Lords are from all over the world.”