I would rather have npc react on level and equipment, also enemies, if you run into level 10 bandits at level 50 they should act very polite, people in towns would not act this way unless you threaten them and have notoriety as they know the guards will protect them.
A warrior in daeric armor looks more dangerous than a mage in dirty clothes even if the mage is more dangerous however I don’t expect the game to factor in this.
Might also work the other way around, people will not respect a low level character expect to be bullied or people demands bribes to help you or even access services.

This has NOTHING to do with what AI does.