Unfortunately it really turns me off making any game harder by just giving the AI crazy stats and as far as I can tell that is what the top difficulty levels are like.
Don't pretty much all of of this style of game do that? Civilization certainly does, which is the closest comparison. I believe the Civ AI cheats with fog of war, too.
I was pushing hard for better AI in LH, but by that I mainly meant "less brain-dead" AI. Brain-dead AI is just annoying, it takes away any sense of achievement you get from beating it. To a large extent I think 1.3 fixed this though, the AI is at least fairly competent now. I don't really expect it to beat a human in a fair fight, there are just too many variables.
I've beaten Ridiculous three times in a row now playing different standard factions. Magnar was fairly easy, Pariden and Kraxis I had to reload a couple of times in each game after I lost my best stack from underestimating how strong the AI was. I had to reload the Kraxis game after the AI immobilized my best stack with strategic spells. Call this cheating if you will, but I don't have enough spare time to spend twenty hours playing a game and then have to restart from scratch because of a stupid mistake. The AI might have beaten me in those games, not sure, or I might have been able to recover, but either way it was going to be an additional twenty hours of hard work.
I've not tried Insane yet. I don't believe in switching off Spell of Making. I believe Fallenchar prefers the good guys to the Fallen, but give me Summon Skeleton Horde and Sacrifice any day. Sacrifice basically means you can farm a city or two for mana, and mana will win you the game. I may give Insane a go with one of the stronger factions; Magnar or Kulan or Ceresa probably suit my play style best, I think I'd have a chance on Insane if I played one of those factions. But I can certainly imagine losing to a Spell of Making victory, or just getting crushed by an AI with armies which are too strong for me. Stopping a full AI stack on a high difficulty level can be touch and go.
I guess my answer to the original post would therefore be, if you don't feel the AI is providing a challenge, up the difficulty.