If the connector gets wet, the bike wont run. Also, if you disconnect the connector, you can start it in run and run it in start. This is helpful because you can leave the switch in the start position, and if the kid bumps it it will have to go through run to get to stop. Not a common issue, but you never know what might happen.
No, the switch is just that, a switch. I believe the circuitry that limits the rpm's is in the CDI. Unfortunately, I don't have access to my manual (left it in Georgia when I moved). As I recall , the switch has 4 wires coming off of it. Two of these are separated and have single pin connectors behind the number plate. These are the ones that kill the engine when the switch is off. The other wires share a 2 pin connector, this is the circuit that prevents the engine from starting in run or revving up in start. When that connector get water in it, the engine wont run. Disconnecting it does no harm to the machine, for racing purposes, it makes life a bit easier, however the AMA rules prevent disconnecting the switch in sanctioned events.