Image image = GenerateImage.toImage(true); //this generates an image file
JLabel thumb = new JLabel();
thumb.setIcon(image)
You have to supply to the JLabel an Icon implementation (i.e ImageIcon). You can do it trough the setIcon method, as in your question, or through the JLabel constructor:
Image image=GenerateImage.toImage(true); //this generates an image file
ImageIcon icon = new ImageIcon(image);
JLabel thumb = new JLabel();
thumb.setIcon(icon);
I recommend you to read the Javadoc for JLabel, Icon, and ImageIcon. Also, you can check the How to Use Labels Tutorial, for more information.