I have Icex editor and used it for some time but unfortanly i never reached great results. Maybe it was just me and i must admit i didnt worked hard for such results.
In huge worlds i never reached good frame rates and i never understood why it didnt support z-buffer / dynamic / soft shadows. It compiles a shadow map its true, if you like those shadows its a possibility.

I dont know if icex editor was updated meanwhile, because there was some issues with version 6.4 or superior, with the object placement / physics, but im not sure right now.

As for your first idea, if you have max skills and it is your modelling package i think it is possible to do that, its a fact you have to bake the textures.

Also, you may consider some plugins to obtain great soft shadows and other shader stuff like bloom and some post processing effects - Sylex 3 (free) or sphere engine.