To sufficiently draw people into a game emotionally as you describe, you would need to be sure that the player is going to play the game for a time period for enough things to happen to evoke a response. This period of time is going to be quite long when you consider modern games. Assuming several things need to happen to evoke a response and game-play need to be interspered in there.
Assume you require to show the character in happy times, cue intro fmv. Now, either A) go to sad sequence to hope to evoke some emotion – too quick, no effect, or B) (ala Fable) bring in some game-play for this time period to get you used to current settings and then bring in an event. How long should this game-play be? What if some players are quick or some are slow? To get a strong emotional feeling you are going to have to have several “events”, whether they be fmvs, dialogue with characters or other… Timing in movies is crucial and this is why is not really possible to do in games.
Another problem with this is that for the most part I think when a player sees an fmv playing, their attention to the game detacts a little. You’re just defeated a tough foe or completed a level, this is the time to relax and enjoy, not to think deep thoughts.
I’d love to see what you suggest happen as I have been known to play games for long periods at one sitting and some feeling other than, “phew, did it, pat on back” would be really good, but I don’t think it would work. Selling it to a publisher would be a nightmare I reckon.
Also, I think XIII did the flashback thing quiet nicely.