I can't speak in details about adding a terrain model via XML file becasue I have not done this procedure as of yet. In working with the software though in other aspects I have noticed that sometimes the data created in a DGN file does not automatically appear in the project explorer dialogue as expected. I have gone over and over trying to figure out what I was doing wrong only to find out that it was simply the project explorer list that was not being updated when an import happened. Have you verified that this isn't the case? I know it's a silly answer but I have wasted time in the past thinking I was doing something wrong when the list simply wasn't refreshing.
Marc