I see the German lines in Italy to be 'primarily' natural. The actual fortifications that the Germans built would have been about a level 1 or max, level 2 fort. Monte Cassino required virtually no work on the part of the Germans to create a massive fortress. Most of the difficulty of advancing was due to terrain, which made it difficult to move, but also generally suited the defender.
Possibly there should be an event that creates one instant fortress where Monte Cassino was, representing allied bombing creating a fortress where there once was none.
I did add an event that would not only puppet the RSI, but give military access to Germany (however, will they defend Italy is another question). I think that maybe giving the RSI 'token' northern provinces might be best, as in all of my tests the RSI sends everything they have against Southern Italy.
Also, I don't think that any other territory should be 'given' to Germany/RSI other then Northern Italy. Realistically, the Axis had to fight for Italian territories in the Agean sea and Balkans, resulting in thousands of Italians killed, and tens of thousands imprisoned. It also required that a lot of Germans be diverted from the front lines to take care of this new Italian threat. I have tested out the game where Italy keeps its Balkan provinces, and they are quickly swallowed up by their enemy neighbours (Bulgaria and Germany eat up these provinces within the month after battling with Italian forces).