You are encountering a "Windows-ism", nothing to do with Fusion.
You need to perform a fresh installation of Windows if you are installing a Windows 11 ARM VM. To do that, choose "Custom: Install Windows only (advanced)" in the "Which type of installation do you want" dialog:

Upgrade installations of Windows (say from Windows 10 to Windows 11) are done from within the running system using the setup.exe found on mounted Windows installation (ISO) media, Upgrades can't be done via the standalone installer which is what your error message is telling you.