Jerry - Four years ago on our tour we had one couple 2-up on a 12GS, so "yes". The rider (a Canadian!) was quite good. However his partner did opt to ride in the SUV for a couple of the hairier sections (maybe 2 hours total) - this was on the F-roads, which can be avoided as needed.
Here's the general scoop on roads:
- City/town roads are well-maintained asphalt.
- Most roads out of town consist of sections of asphalt interrupted by decent gravel sections (50-50%).
- "F-roads" are minimally improved tracks used almost exclusively by utility vehicles. Normal cars are prohibited, but 4-wheel SUV & bikes are allowed. Large rock base overlain with dirt, also sand or volcano ash in some sections, occasional water crossings. Not conducive to 2-up but can be entirely avoided unless one is hell-bent to reach a remote spot.
-There is no traffic once away from Reykjavik. Might see 2-3 cars per hour. However will see hundreds of sheep and dozens of horses per day.
-Grading of gravel roads occurs on occasion - just slow down in the work zone.
-Rental bikes are BMW GS of various displacement.
Here's a link to the Iceland Highway system - good depiction of their infrastructure. Also, I have a great road atlas which we can look at to get a sense of the terrain.
http://vegasja.vegagerdin.is/eng/