It's Application Control the module that has that setting, and here is how I have it:
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But, maybe sometimes some trust/signed applications will be moved to restriction groups, I constantly check my Application Control to see what's happening there, untrusted or trsuted applications, startup blocked applications, etc.... that's the price We have to pay of being paranoidI have no problem with this...
About KSN rules, yes is cloud/internet dependent, but I think/guess if You don't have internet in a moment, Kaspersky has a local cache of the last synchronization.
And yes, obviously disabling it will affect analyze... then a heuristic analyze will be performed when a new application is started, but You will not have the KSN benefits such as Application Whitelisting, Urgent Detection System (UDS detections), etc.
More info here: http://www.kaspersky.com/images/KESB_Whitepaper_KSN_ENG_final.pdf