They were carved purely for decorative, military, and spiritual purposes. You can see in narratives like Landnámabók where sailors remove their prow-beasts to avoid disturbing or upsetting the vættír, or spirits, of the land they were looking to land in. They were also pretty good indicators of military intention - basically, they were a signal saying "We're armed and willing to fight you if you try something dumb/we're looking to take your stuff."

After the conversion, the tradition was still maintained, but the spiritual reasons were, officially, dropped.