The wikipedia article about Cthulhu talks about "Lovecraft's original conception of a meaningless, value-less universe with no eternal struggle."
Cthulhu (Wikipedia) Another quote in that same article is
Wikipedia (Cthulhu) said:
Cthulhu's amorality might be compared to what S. T. Joshi and David E. Schultz call the "anti-mythology" of Lovecraft's fiction[7]. In most mythologies, man's significance in the universe is validated by his connection to divine agents with similar moral values. Lovecraft shattered this conceit by basing his stories on the "premise that common human laws and interests and emotions have no validity or significance in the vast cosmos-at-large... To achieve the essence of real externality, whether of space or time or dimension, one must forget that such things as organic life, good and evil, love and hate, and all such local attributes of a negligible and temporary race called mankind, have any existence at all... [W]hen we cross the line to the boundless and hideous unknown—the shadow haunted Outside—we must remember to leave our humanity and terrestrialism at the threshold."
I am not sure this vision of the cosmos is reflected in the Inside game setting. It needs to be more nihilistic; the cosmos is big and uncaring, and the players are ultimately doomed. Most people are unaware of the true nature of the cosmos, and in fact are minds cannot grasp the fact. If people become truly aware that the universe is in fact utterly indifferent and unintelligible to them (not merely hostile or mysterious) their minds can't stand the strain; thus the insanity.
Alternatively (and this is a more Nietzchean take) characters who gain insight into the essential nature of the world are freed from social standards and are free to behave in ways that seem insane/evil. Or their behavior can be due to a deeper pathology; they are emotionally dead, and only the most extreme behavior can waken a sense of connection to the world. Or they have decided to be emissaries of the uncaring cosmos, and with missionary zeal try to impress on people their worthlessness; usually through horrific torture and death. Or...
I guess what I am trying to say is that you just can't add
insanity related abilities and make the setting lovecraftian. You have to have a cosmology that is radically non-humanocentric.
I think that the idea of combining fantasy d20 and the Cthulhu mythos is a great idea, but only if you incorporate the nihilistic cosmology of the Cthulhu mythos. If it is just d20 with tentacled monsters, well, that is less interesting. IMHO; other people might like D&D with tentacles.
Features of D&D which are in tension with Lovecraft are things like alignment- particularly the notion that there is objective right and wrong. Gods too; the notion that there are higher powers who care about humanity (by which I include humanoids), and who help some humans. The fundamental stories are in conflict too: The fundamental story of DnD is about a group of adventurers who leave civilization, overcome challenges, and return wealthier and more powerful. The fundamental story in Lovecraft is about ordinary people who stumble onto things Man Was Not Meant to Know and who then die/are driven insane/escape by the skin of their teeth.
Now you can play DnD with a different fundamental story (and there are different themes that are also lovecraftian), but the default story tends to support the story I sketch above. And many of the other stories in DnD are also incompatible with lovecraft; the story of the battle of good vs evil doesn't really fit the theme. Neither does reason vs insanity or reality vs the far realm. The DnD trope of increasing power can fit lovecraft if this power makes the characters less human and more transhuman/inhuman/posthuman. A design goal would be to make it so that powerful characters would be overwhelmingly tend to indifferent to ordinary people and have goals and motivations unintelligible to them. That would be lovecraftian. Low level characters would champion conventional values, but would gradually turn into monsters. That's lovecraftian too.
I think that to do the setting justice you have to make the Inside setting not merely a demiplane, but the whole multiverse. Somehow conscious life began in an inhospitable universe, and created a world friendly to it; that's the multiverse. A kind of mass self-deception given tangible form. But the multiverse is a hollow shell compared with the incomprehensible other of what is truly real, and it has sprung a leak. The structure of the planes has collapsed. The gods have been eaten by Far Realm monsters. Good and evil, law and chaos have all lost their status as building blocks of reality.
Say that the multiverse is the dream of an overgod, and the overgod is insane; he believes in things like good and evil, he thinks that human life is significant in the overall scheme of things. But now he is starting to recover, and is letting go of these delusions.
