You don't even necessarily need to have them coming up with valid speech. Simply giving out random quests and rewards would keep people running on a loot treadmill for most open world multiplayer games.
Letting generators run free on the client sets up different kinds of immersion-breaking, where NPC's hallucinate misleading details about the story/world, can be tricked into reciting off-topic absurdities or age-rating violations, etc. AAA studios can't afford the embarrassment of that and smaller designers with pride of craft won't see their signature come through the art in it. Surely, some designers will figure out ways to make it work great for some specific idea, but it's not the best way to use the technology in most cases.
While the costs are hidden from end users and are going down quickly, good LLM's remain very expensive to run and very hard to keep on track compared to other options.
I never said that every interaction with an NPC must necessarily require AI to create a new quest and reward from scratch. Players aren't that savvy. You just generate a pool of quests and assign them to NPCs in the instance. Players who are addicted to loot treadmills will stay in the game and pay for boosts and other rewards as long as there is content to engage them. This more than pays for the AI service.
I think there is value to be gained in having LLMs as part of the development process, maybe even the game itself, but I think conventional methods are about as sufficient for quests.