I can't see how an open world action-RPG should be more inspired in terms of difficulty settings than modifying the damage penalties and enemies health. This is not a game of chess where you can set how many moves the computer can compute. And yes, I've read the OP and I don't agree with anyone of his proposals. As far as I'm concerned, difficulty settings shouldn't even exists in first place.
It could certainly be much, MUCH more inspired than that... that is, ofc, considering there was a good AI in place. Increase the mobility of enemies, the spells and skills they have in their disposal, then it's pretty simple to just limit some depending on difficulty level. On hard, they would face you with full dodging AI, a full arsenal of spells and weapons enchanted with things like paralyse... on easy they would just stand in place and take a beating, have very basic armors and weaponry, the mages would only cast novice spells etc... the other levels would be somewhere in between...
Or, even better, get rid of the difficulty levels, along with the enemy level scaling. With a bit of careful placing of enemies and dungeons, and maybe even the use of some level modifiers or damage caps for lower level enemies (for example, you deal 755 damage to enemies more than 5, and 50% damage to enemies more than 10 levels below you) it's perfectly possible even in open-world skyrim... which would also bring the difficulty to the good old style that has always worked: too hard for you, go back and do quests to level up, too easy, go tackle that high-level dungeon...