I'm confident the first games trying to have an AI as game master are being built, if not demonstrated already.

And I'm also confident that they will not make for good games because the players will find and exploit loopholes. I think LLMs in (video) games are here and here to stay, but they will only be actually beneficial to a game if they are tightly restricted and limited in scope. (no having your ingame partner write your code for you)