You're missing nothing: as you believe, the correct answer is 1. had met.
When wish takes a complement content clause† the verb is always in 'subjunctive' mood—this requires that the verb group be led by a past-form verb, and in formal use if the lead verb is BE it is uninflected for person or number.
A simple-past-form verb thus has non-past reference: you wish something were the case now or you wish we met tomorrow at one o'clock instead of noon. If you are referring to a past event, you've already 'used up' the past-tense form to signify subjunctivity, so you recast your lead verb as a perfect construction; in this circumstance the perfect construction does not have perfect meaning but acts as a past-tense marker.
So the exam key is in error; let us hope that is merely a typo or brain-fart and not an indication of the examiner's incompetence.
You should be aware that in present-day colloquial English—in both speech and written texts which emulate speech—use of the 'subjunctive' past and of the perfect construction has been gradually declining over the past century. You should not be surprised to encounter "I wish we met ten years ago" in speech. But I would not take that as license to employ a simple past form in this context in your own speech or writing, and certainly not as license to recommend or prescribe this form to learners. Following the 'rules' I have described above will not mark your speech as pedantic or literary or unduly formal—the rules still (in 2016) reflect standard use in all registers.
†That is, a complement clause headed by a finite verb; the clause may or may not be introduced by that. Wish also takes marked infinitival complements: "I wish to be happy", "I wish him to be happy".