Coming from Iceland myself I feel obliged to straight out any misunderstandings.
Tipping is definately not seen as an insult in Iceland!!!
Although it is not common practice among natives, people are aware of the fact that this is common practice in many other countries and it is therefore very much appreciated within service staff. My brother, as well as several friends, who work in hotels and restaurants, are used to recieve tips from tourists and are always very happy to know when their service is appreciated.
Now, I have to ask, where on earth did you find that silly information???
Bye for now
Freyja