One of the key problems of making a decently scary horror film, which applies doubly to games, is the visible monster dilemma.
A lot of horror films go to he last possible moment before showing you the full "horror" of the monster- witness the monster POV shots, or scenes where a flash of the arm/claw/tentacle/maw at work, whilst the grisly results are central to the shot.
The full appearance of the monster is reserved for a later point not only because of the way that terrible, blatant latex or CGI effects cheapen an otherwise scary scene, but more because the theme in most monster movies is fear of the unknown (or the dark side of the familiar, known world)
I would cite the differences between the first 2 Alien films (Alien3 onwards can go die a lonely death, preferably in a fire of some kind...) is the extent to which the beast is seen. The same beastie, whilst definitely higher quality than many contemporary creations, is simply not so scary when visible, en masse, and opposed by a black ops team in stand-up winnable firefights as it was when it jumped out of hatches and picked off the civilian crew of a spaceship one by one. Hence Alien = Horror, Aliens = Action.
Obviously this is a difficult problem for horror game designers to tackle- without the visual of the monster, players have nothing to aim at and may not even know when they're supposed to be scared unless some other methods are used.
Zombie movies tend to run opposite to the trend- Zombies are often seen from early on, but I think that revolves more around the escalation into a world-of-the-dead scenario- the horror comes not from the individual scariness of the undead (any able-bodied adult can outrun and/or outfight them 1-on-1) but their crushing force of numbers, the isolation from external human contact (and the inevitable thinning of the survivor group, including inevitable "turning" scenes) and the growing despair of the central characters ever getting out alive.
This may explain the popularity of zombie-survival horror games. Personally, I think a game based on the tabletop RPG All Flesh Must Be Eaten or Max Brooks' Zombie Survival Guide would be good to see. Games like GTA:San Andreas, Boiling Point, Stalker, Just Cause et al. have given us the sort of mechanics needed for a free-roaming game set over a huge expanse of terrain, where the challenge is provided not by the usual arms-race/ firepower inflation but by wiping out supply posts throughout the course of the game, as the infestation spreads. Make it so an individual has to consider the real time spread of the infection (best of all if this is something (s)he can affect through actions- the decision of who to save in real time would make the game horrific and add replayability) and populate the remaining bastions of humankind with interesting, memorable NPCs.
Any designer who makes this is welcome, providing they break me off a free copy.
EDIT: Having looked at the Dead Island site, it's on the way to the sort of thing I had in mind, but without the kind of scale I had in mind: picture that over a map the size of San Andreas or larger with distinct towns which you can watch fall one by one or fight to defend.
Outposts run by biker gangs, survivalists, the National Guard or what have you, where might makes right and you may have to compromise your moral viewpoint to get that safe bunk, box of shells or even tinned food.
THAT'S survival horror