Yes, the platform imposes a hard limit of 1000. This is not documented anywhere so you are right to be surprised. The only way to change this would be to apply a hack to the client javascript code, which is probably not advisable.
For a reference selector the advise is to use a page for selecting options if there are more than 20 options.
See https://docs.mendix.com/refguide/reference-selector
There is a limit for how many options will be shown. The same holds true for a filter of a datagrid and there is no setting that will influence this behavior. To make sure the user can filter on all the options change the search field to a text box. This will also help improve the performance of the page with the datagrid as the options no longer have to be generated and rendered.