Well, understand that I completely get where you're coming from -- and that would make a very interesting game. But, to take an analogy from another game: does Locke become a stranger to everyone else in Final Fantasy when I use him as my character? Is Terra suddenly ripped from her former self?
You could certainly make that the case, and make an interesting game based on possession. But there's nothing that says it is implicitly that way, either. When someone is an NPC, they're governed by the general game code and the decisions it decides to make for them. When someone is a player avatar, then the player makes the decisions instead of the game code. I liken it to being the overlord in Descent or Zargon in Hero Quest: I control all the monsters rather than having the computer do it, but the result is still thematically the same.
Not to say that the avatar thing can't be done. You could just as easily have Zargon posses a Chaos Knight and fight the heroes in that form. And you could even have some special game mechanics that go along with it. But that's a conscious design choice, and I think it needs to be a rather fundamental underpinning of the design, and it also leads to a lot of close encounters with the fourth wall that have to be carefully managed. It's very, very doable, and I think it would be great -- but it's also a really specific design that affects a whole lot of thematic elements in ways that we don't want to affect them.
Specifically, in AVWW, you the player don't exist. "You" don't have a personality or an ongoing good/evil ratio or anything like that. Rather, you take over one character at a time, and they have personality that comes from their past and that you might inject. They might be heroic or not, etc. They might be a brutal murderer because you made them that way, and everybody is glad when they die. But when you get the next character, you now have that character's past, not the muderer's.
Sure, you could again say the possession idea makes sense there still, and you'd be right that it definitely could still work given the above. But where I don't like it, for this game, is that it implies that some higher power -- you -- is looking out for the world at large. In AVWW, some of the Illari sort of look out for certain small areas of the world, same as some of the Illari really screw with certain small areas of the world, but there's no overarching good or evil force in the world as a whole. It's a mess of city-states and regions with their own problems, and their own interconnections that crop up.
What you, the player, are doing is shepherding the whole thing through your unseen hand, for good or for ill. And it might be for good AND ill. You can roleplay one character as a complete jerk, and then roleplay the next as a saint when the first one dies. Completely up to you.
Though, I don't want to make too big a deal out of character personality at this early stage, because pre-1.0 we're basically going for JRPG levels of characterization there. Which is to say, light. The first focus is on the communities, the bad guys, and the really broad things like deeds and hopes. Of course we intend to keep developing this post-1.0 if it's popular enough to support us working on it, and more stuff with the settlements and individual characters are at the top of our list for that if we hit that point.
But first and foremost this is an adventure game, and sort of a roguelike, and sort of a very light city builder, and sort of a twisted form of strategy game. RPG isn't really in that list at all, although it does have some RPG-like aspects such as character stats, backstory, etc. But the focus is on you and your decisions, and how you accomplish the various goals that you decide are important to you, rather than on progression through a rich pre-scripted scenario, is I guess what I mean.
Anyway, hopefully that explains our decision-making process a little more, in terms of what angle we're viewing it from. I really do like your idea quite a lot, but I think it fits better with an RPG.