Yeah, MS Flight Simulator with a world that's "inspired by" ours... The original 2020 version had issues with things like the Sydney Harbour Bridge (did it have the Opera House?), using AI to generate 3D models of these things based on pictures would be crazy (of course they'd generate once, on 1st request).
So if you're the first to approach the Opera House, it would ask the engine for 3D models of the area, and it would query its image database, see the fancy opera house, and generate its own interpretation.. if there's no data (e.g. a landscape in the middle of Africa), it'd use the satellite image plus typical fauna of the region..
I believe there's games that have that already. My concern is that it's all going to be sameish slop. Read ten AI generated stories and you've read them all.
It could work, but they would have to both write unique prompts for each NPC (instead of "generate me 100 NPC personality prompts") and limit the possible interactions and behaviours.
But, emergent / generative behaviour would be interesting to a point. There's plenty of roguelikes / roguelites where this could work in, given their generative behaviours.
I guess for combat, you would want ones that could sensibly work together and adapt, possibly different levels of aggression, stealth etc Even as good as FEAR would be something.