I think most Icelanders, including myself, would start off conversing in English as a matter of courtesy; it would be rude to assume that a person of an ethnic minority isn't Icelandic based on their looks. A lot of times they are indeed Icelanders of ethnic minorities, and you avoid a situation embarrassing for both parties, and perhaps make them feel more welcome in the country they were born in.

When I went to Iceland, I was expecting to see close to zero immigrants and their descendants among the Icelandic population. I was surprised to see quite a few people of African and Asian descent working in Icelandic stores and speaking fluent Icelandic with the customers.

I found that the children in Iceland know English surprisingly well. My children were playing with an 8-year-old Icelandic girl who spoke nearly flawless English. I was impressed.