The first difficulty you choose when creating a world is the "World DIfficulty", which dictates how hard "the wilds" will be. The wilds refers to areas that aren't under the influence of factions. Now im not exactly sure what it does, but I suppose it makes roaming monsters spawn more frequently and maybe behave in a smarter way.

When you choose oponents you choose their difficulty individually, and I agree that it is a bit confusing I had the same question when I was testing the Beta versions.

I, too overlooked the individual difficulty settings for the enemy factions the first time I set up a game, but it's clear now. 

An idea: why not have an option where the difficulty setting enemy factions are picked by me, the player, but randomly spread over the factions. So for instance I could choose 5 enemy factions; two of which are on higher difficulty setting (thus probably stronger) than me, one on the same setting, and two on lower settings (to create an early incentive for warmongering). It's only while playing that I find out which is which. 

What do you think? 

We need a random AI (with min/max values)