This post has world generator parameters and stuff to generate small islands. What it does is give you a world full of relatively small islands, and you'll have to search for the smallest ones among them that can fit in an embark. You'll usually get around twenty embark-size islands for every world gen.
I have done it a few times on different embarks. With sea all around, you will not get migrants or traders, ever. That means that what you bring on embark is the only import you will ever have. Land creatures won't respawn either, as they have to come in from the map edge. You will get an initial wave of land animals that appear from nowhere, but after that, you'll only get birds and fish. If you take an island with frozen sea around it, the ice will be treated just like land, and migrants and traders will come in from there. I do not know whether flying megabeasts or titans will still appear, but I presume so. I'm not sure, but when you open up the caverns, it is possible that you will start getting migrants and such from the map edge underground. I might reach the caverns and report back later.
As for the gameplay, it's very similar to playing with the outside world closed off on a regular embark, only you won't have to deal with the ghosts of migrants.