Your temporary driving certificate is valid for three years. Once you have been driving for 12 months, without any points in your license, you can apply to get a full (permanent) driving license.

First of all, you book a driving assessment with a driving instructor. Once that is done you will receive a link for an application for a permanent license.

A driving assessment is not a test, so you can not fail it.
It starts with the driver filling out a self-assessment (in either Icelandic or English). Following that the driving instructor will give you directions while you go for a short drive, while monitoring your driving. In the end of the assessment, the instructor goes over their finding and compares to your self-assessment.

The purpose of a driving assessment is mainly to refresh and review, and to get good advice if needed. 

A driving assessment lasts 45-50 minutes. It can be done on a teaching vehicle, or your own car (as long as it has a full inspection, is in working order and is clean on the inside).

Book a driving assessment.

Information on driving assessments and permanent driving licenses.