The manual makes it sound as if "Difficulty" under "World Options" on the first setup screen only controls the creatures of the world, not your AI opponents.  The next page screen's "Typical Intelligence of Opponents" sets your AI opponents.

However, in-game,  the mouseover on the first page is ambiguous... "The AI gets no bonuses but is not using its best algorithms."  This implies that it is the AI opponents that are being adjusted, not the creatures of the world.It is the same wording as that given in the mouseover on the second page for "Typical Intelligence of Opponents."

Now, though, I have been experimenting with higher settings of "typical intelligence of opponents" on the second page, and I am 95% certain that this is making the creatures of the world more aggressive -- whereas at normal settings the creatures rarely followed me around, now they seem quite capable of following and cornering weak units.

I think the two settings may be muddled together.