This paper conducts simulation research on engine torque ripple suppression based on the engine torque observer by using a flywheel-ISG (integrated starter generator). Usually, engine torque can be suppressed by using a passive method such as by installing a flywheel or torsional damper. However, failure problems arise in hybrid system because of different mechanical characters of the engine and its co-axial ISG motor. On the prototype test bench, the flywheel of the engine has been removed and replaced by an ISG rotor, namely FISG (flywheel ISG). Besides, the crank and FISG rotor are directly connected, which means no dampers or clutches are installed. If the engine torque ripples can be suppressed by the same level as the flywheel and damper by FISG active torque compensation, the new system can be more compact and economical. Simulation efforts are made to verify its feasibility. Firstly, based on the experimental test bench, which is currently under construction. A mechanical model was built based on LMS AMESim. Secondly, the engine torque observer is built based on the simplified dual-lumped mass model, of which the inputs are in-cylinder pressure signals and the crankshaft position. Finally, the speed fluctuation under different control cycles and motor response time constants is simulated. Simulation results indicate that, by adding high frequency torque compensation by FISG, the speed fluctuation caused by engine torque ripples can be significantly suppressed.