Is setting criteria to the strong? Does the setting provide background? Does the setting give historical, physical or other information that is key to the story? what conflict occurs?

The setting in Twelfth Night is noteworthy largely because it seems to offer a fantasy world. Illyria is as much a place of the mind as a geographical location. While there is a real Illyria, on the Adriatic Sea, it seems that Shakespeare might have selected the name for its lyrical potential and for its romantic possibilities. It is a place where normal expectations (e.g., nobility act differently than commoners; gender is a reliable marker; marriage is a matter of family, not individual choice) are suspended. Characters move through this world in an almost dream-like fashion as they improvise their way through situations in which conventions are temporarily suspended.
Illyria thus provides the "second world" setting common in Shakespeare's romantic comedies (e.g., the forest outside of Athens, the Forest of Arden, post-war Messina), which proves ripe for the desires and fears regarding romantic love to be tested.