A 5 KW isolation (not an auto transformer) transformer 240 volt primary and 120/240 secondary center tapped and ground the centerpoint should be compliant. The supply bare wire is a bonding conductor not a ground wire. A new ground at the second service. The new neutral has a bonding jumper installed so the service and new system are bonded together. I don't know why the inspector would need the bond wire to be insulated.
Caveat My answer is based on the CEC but the NEC requirements should pretty much match. Technically this works and is safe.
