3 reasons paint is faded/peeled:
1) front end repair and subsequently poor paint job - seen that a million times...
2) rarely (if ever) washed & waxed...check the roof when you do see a hood all faded, typically all the flat surfaces will be faded as well (especially here in the southwest!)
3) engine fire! in which case that dang insulation isn't gonna help.
Incidentally, that insulation on the firewall and the hood in some cars is strictly for noise protection, not any kind of heat, and, as Eric mentioned, will only INCREASE the engine compartment temperature, which is not good unless its in Alaska...