I don't think people who use fiction when they're talking about setting are doing the English language any favors as far as its reputation for clarity goes, but fiction neither connotes nor denotes anything about form, unless there's something in the context to say otherwise. No one describing what emerges from TRPG play as fiction is automatically talking about a story someone might have prepared.It is but it is easy to slide into definition 1 (and one is very ambiguous so ripe for equivocation)