Hi Jack, this is expected behaviour.
If a single/multi-select option is removed, it does not directly affect historical data. The value will remain. However if you then edit a ticket where the value is no longer valid, it gets blanked out forcing you to put in a new value.
As an aside, starting in - I believe - version 20.18.03, you can rename a drop down value. I believe the only major issue with that at this time (as of 20.19.02) is that the old name remains in the workflow GUI. And of course, business rules and templates that used the old value aren't auto adjusted to the new value. Whether that's a bug or feature request, I'm not sure TBH.
If you are looking to replace a dropdown value (ie: rename and replace) then that feature does not exist. There is a feature request you can vote on here: Replace single/multi select values - FP12
But you can also make this change directly into the database if you want (or you can use a time-based business rule if you want to be more "proper" about it).
For the DB... update fpdb001_ws_001.incident set dropdown = 'NEW VALUE' where dropdown = 'OLD VALUE'... for example. Adjust as needed.