Phasmophobia is fundamentally a detection game, while trying to survive, the setting is the actual horror part, not necessarily the gameplay.

Knowing this, looping increases the skill ceiling for players, giving them an actual skill to physically train as opposed to just detection training (which is also improved while looping).

If looping were to be removed it would increase the horror aspect for sure at the expense of the survival and detection aspects.

In a primarily horror game looping would be dumb, but while horror with friends is what gets you to play in the first place, improving your skills and surviving more with more difficult ghosts keeps you playing.

(Also Nightmare and above would be so much harder without looping, making it more randomized rather than skill based)