I play on normal, with monsters dense. As for why I go for monsters dense, I tried monsters rare once and out of the six lairs within 20 tiles of my city, two were bone ogres, one was a Fell Dragon, one was a bandit, one was a cave bear, and one was a juggernaut. There's not really anything I can do against that in the early game, and being unable to level heroes (or, for that matter, really start expanding your borders) hurts quite a bit. I'd rather deal with lots of monsters and run the risk of having strong interspersed with weak monsters than deal with a handful of very strong monsters.
1. Not usually, but there are a few times when it looks like the monsters decide to go attack something when not bothered by anything before that, or the whole "I'll go halfway across the world to attack some city settled by the human player rather than beat up this AI that just ticked me off". Occasionally a monster that gets freed for no apparent reason.
2. Yes and no. I have had numerous starts where nothing weaker than Medium-challenge enemies has been visible around me, and things like Ashwake dragons within 20 tiles of the starting position (and no direction of expansion that doesn't go past at least one group of monsters of similar strength). On the other hand, I'm currently playing a game where I have only seen one Fell Dragon anywhere near my starting position, and a Hoarder Spider nearby, and the rest have been Darklings, Mites, Bandits, and a handful of Widow Spiders, Trolls and Cave Bears.
3. Sometimes. I've seen the AI settle a city in the tile next to a Forest Drake and the Drake started moving towards me (when my borders were ~20 tiles away) rather than after the city right in front of it - though the AI was Tarth, and I'm not entirely clear if Master Scouts applies only to units or also affects cities.
4. Not often, but it does happen, especially if I'm careless in pacing the city or am 'lucky' enough to be near a foolhardy AI who likes to build outposts/cities next to things better left alone.
5. Depends on how early in the game it is, or if I am for some reason particularly attached to the city that was just leveled. If I only have a few cities to begin with, then yes I probably will start a new game, because I can't really afford to fight whatever killed the city at that point and I don't believe that monsters go back and settle on their lairs after destroying whatever might have released it.