You can use the onboard flash for many situations, especially close subjects or with clear visibility to mid range. I have used it exclusively so far with my Olympus 3040z/PT-010, but want an external flash.
External flash has several advantages and disadvantages.
Pro's:
Less back scatter
Shorter recycle time
longer camera battery life
Usually brighter than on-camera flash
Con's:
expensive ($600 or more).
Bulky
Limited TTL exposure support
Guesswork on manual exposure control
For cloudy water or deeper water, or subjects more than 3 ft away, you benefit enormously from an external flash. In shallow water, you don't need any flash and will be limited only by water visibility. The attached is an example of a shallow scene with poor visibility (Sabang, PI canyons, Dec 2003), makes me wish I was there though.