A good TMA school will include application drills in the training.
Sparring can be part of that, but there are lots of ways to spar and some ways are better and more useful than others. Open, heavy-contact sparring really isn't all that necessary for most people, if they are training for personal self defense and not training for the ring. Heavy sparring leads to injury, and that can build over time and turn into bad stuff down the road. If you choose to do that because you are involved in a combative sport, that's your choice and it's fine. But to pretend like that approach to training is THE yardstick against which all training must be measured, is simply not true.
No, you do not need to do heavy sparring, and yes, you can still develop good self defense skills.
Yes, there are risks in MMA for injuries, much more so than TMA. But it's just fun. Most do it for the adrenaline rush. This why MMA is taking over. It's just fun to compete. You can't really compete by pretending to nut & eye strike. No one wants to watch nor participate in that.
Training SD techniques and sparring light to medium is certainly valid and certainly better than nothing. I never implied that it was useless. Just that training in MMA and sparring light to hard for KO's will prepare you for the real fights much BETTER, whether they be in the ring/cage or in the streets.
The main problem with SD play fighting is that it never addresses the high possibility of getting punched in the face, repeatedly...especially if their SD techniques fails. SDs' chins _USUALLY_ have never been tested for real. Not just the chin, but the rest of the head, body, legs, etc. Most people get a rude awakening the very first time they got punched in the face. Some freeze up or panic. It takes time and dedicated practice to get used to this and to continue to fight.
Even Bruce Lee thought that he could just end the fight vs. Jak Man Wong with a few eye & throat strikes in a matter of seconds. Ended up with 2 stories. One from his wife & Bruce himself claiming that he won while the other by Jak Man Wong who claimed that Bruce Lee tried to kill him with deathstrikes in what was supposed to be a friendly match, yet he managed to beat Bruce after ~20 minutes of fighting. What was certain was that Bruce renounced Wing Chun as his sole base training and started cross training what works....Boxing, Muay Thai, Wrestling, Judo, etc. <- I'll get in trouble for this one.
Another problem with light sparring only, and I'm guilty myself, is that you often take really high risks such as throwing 5 tapping jabs, doing risky moves, etc. because you know the other guy is only going to tap you back. I've thrown a jab, uppercut, hook and uppercut combo with one hand just yesterday during light sparring and landed all 4 punches. The opponent was a noob and I was just not taking him seriously. Got yelled at by the coach because that was not real Boxing and a good Boxer would have dropped me.