Individuals can experience embarrassment when exposed to self-feedback images, depending on the extent of the divergence from the internal representation of the standard self. Our previous work implicated the anterior insular cortex (AI) and the anterior cingulate cortex (ACC) in the processing of embarrassment; however, their exact functional contributions have remained uncertain. Here, we explored the effects of being observed by others while viewing self-face images on the extent of embarrassment, and the activation and connectivity patterns in the AI and ACC. We conducted functional magnetic resonance imaging hyperscanning in pairs of healthy participants using an interaction system that allowed an individual to be observed by a partner in real time. Being observed increased the extent of embarrassment reported when viewing self-face images; a corresponding increase in self-related activity in the right AI suggested that this region played a direct role in the subjective experience. Being observed also increased the functional connectivity between the caudal ACC and prefrontal regions, which are involved in processing the reflective self. The ACC might therefore serve as a hub, integrating information about the reflective self that is used in evaluating perceptual self-face images.