Just as a general point, the circles containing those who have played the Witcher 3 and those who have studied the society of Medieval peasant life may not completely overlap. In general with media questions, it is best to ask about specific features of the village life depicted rather than the village life in general. For example, is it true that villages had dedicated guards, would they have complex divisions of labor (such as a village blacksmith, storeowner, innkeeper, etc) and did Flotsom actually have a garrison, and thus not need no Witcher?

Practically all, if not all cities had competent garrisons, and so did castles. Considering that most villages were in close proximity of some castle, It follows that most populous places were relatively well protected. The divisions of labour that you mention are not quite complex, as being a blacksmith for example requires a lot of mastery, and running a store takes up time and also requires some capital. Considering those realistic limitations, it is impossible to have such tasks performed without specialization. The medieval city was were many of the more specialized trades (elaborate blacksmithing, large scale dying) took place, but cities also were dependant on the ecploitation of the surrounding countryside. Many settlements were surrounded by some sort of walls, often made out of stone, in the case of larger settlements, but this obviously varies by time and place, like anything else. A 14th century city in Western Europe would almost certainly have stone walls, but not such with a 9th century city. Regarding the architecture itself of the houses within a city, I am not sure, we'll have to wait for someone else to clarify that.

The population of a village/city also varies immensly by location and time. For example: in the 14th century (pre-black death), France had a population of about 13-20 million people, distributed among many small villages. That said, there were some cities with relatively large populations, like London, Paris, Barcelona, etc., but you have to remember that medieval society was largely agrarian, so large concentrations of people were not the standard.

Most of this comes from:

The Central Middle Ages: Europe 950-1320, by Daniel Power

The Early Growth of the European Economy: Warriors and Peasants from the Seventh to the Twelfth Century, by Georges Duby

and other sources that I don't have at hand to quote.

From what I've seen while playing, they are relatively accurate (and do seem to be inspired by the 14th century, as another poster mentioned). The villages themselves could be anytime in the Middle Ages, but cities like Novigrad and Oxenfurt are easier to judge. They're cleaner than a real city would be though.

The villages seem fairly accurate as well, though many villages in the Middle Ages were closer to strongholds for protection. In the case of The Witcher, Velen is more or less under the protection of the Bloody Baron, that's why his guards tend to congregate at various inns throughout the area. None of the small villages seem to have dedicated guards, though, just guards who happen to be assigned there impermanently. In the real Middle Ages, peasants and serfs provided their labour to the local lord in exchange for this protection. The cities do have their own guards, though.

A lot of real settlements seem to have been surrounded by high wooden walls, but mainly larger ones as opposed to small villages. Crow's Perch is a good example of a late medieval fort. It is very defensible, with a small moat (often just a ditch in real life, and not nearly as common as the stereotypes let us think, but they really don't overdo the moats in the game so it's fine). After the first gates, there is a small village. The manor and garrison itself is up on the top of the hill, past two more sets of gates. Staggering defenses like this is pretty accurate. Small villages did not need palisades since they were situated close to forts and were expected to go into the fort during a battle - a wall wouldn't help them very much without any soldiers to defend it.

The one thing that I've noticed that isn't as accurate is the lack of villagers working in the fields/working to create food, as medieval society was largely agrarian. There are a bunch in the field outside of Novigrad, but there really aren't a lot of people looking after animals. This is likely due to the limitations of the open world game engine though, since places like Velen are huge and have tons of character models already. Many villages had a green space in the middle of the town where animals were kept communally (that is, animals were owned by individuals but shared a field). Some of the villages in The Witcher have a single cow in a small paddock as a reflection of this, with a few chickens wandering around.

All in all, I really enjoy the world of The Witcher. There are so many small details that make the medievalist in me so happy. And really, even when the game isn't a perfect portrayal of medieval life, it's still a wonderful example of neomedievalism.

Also how severe was the punishment for arson?

My buddy meant death penalty was realistic since fire could spread easily to other buildings.