It isn't automatic - the launcher will open when there's an update available. If you clicked the update button, the software will update and go through the installation process.
That screenshot doesn't help at all...the settings are under the green "..." button. Here's some example settings.. http://www.donaldphan.com/tutorials/xnormal/xnormal_occ.html
I'll try that. :) Edit: Are you referring to that brush icon next to the layer? Because it's turned off, I was under the impression that that was the "bake" button.