I had something similar happen in a 1987 cavalier hood because of bad paint, but I have had 2 Jeeps, and never had any problems with the paint. My 1991 still shines when waxed. Which brings up the next question......Have you waxed it ever? That might cause paint to fade like that. I have never had any insulation under my hood. My first Jeep was a 2.5L motor, and had 190,000 when I sold it. My 1991 has 234,000 and leaks oil from the rear mainseal, valve cover, and who knows where else at this point, but the paint looks great. The smell of burning oil is a whole nudder issue.
Before any comments about the engine burning oil, its not, that 4.0 doesn't burn it. The burning smell is the oil leaking onto hot engine parts. I still love it though.