Yes that is pretty much it, in my above example the rank of "Lieutenant" is a R1 officer. Howver that has nothing to do with the rank part of the design screen. The design screen has a drop down box to select the minimum required rank to pilot a ship. The box with the number then simply states how important this ship is so it can pick an officer provided:
1. They meet the rank required.
2. No ships with a higher priority rated for this rank (and skill set) are requested an officer.
So in my list if we for a moment forget about the skills an officer has. A colony ship wants and officer and there happens to be a single unassigned Lieutenant in the academy and so he is assigned to that ship. But if there was also a fuel harvester without a commanding officer then it would take the Lieutenant and the colony ship would remain without a commander, due to the number rating of importance.
Setting my officer requirements up like this has meant i tent to not get an issue like long time fighter pilots of R3+ (it does happen on occasion but hey if an x-wing was good enough for general skywalker.....). What tends to happen is my military ships take first pick of all officers which means i then have guys in a role gaining promotion points (I always use realistic promotions, and only tend to instant promote someone for a specific role such as admiral). Those officers then become eligable for promotion and thus now meet the rank minimum for selection to a next stage design, and the fresh folks out of the academy get selected for the now vacant roles in smaller/non military craft.
The numbering system is by no means required to make this work, but I find this way if I only have a small number of officers they do not end up flying freighters when more important military craft need them. A knock on effect of this is that military craft tend to have more chances to gain promotion points for their commanding officer and thus allow faster promotion to allow me to bring in more advanced design types that need a higher rank. The one downside to all this though is that you can end up with too many higher ranks sitting in roles for years when they would be better placed higher up, hopefully we will see an addition of a "maximum rank" box for the design screen so it will boot admirals out of freighters and such.