How does sims have sex?

Because the game combines their coding (or whatever) when they woohoo, which is why it's also possible, with mods, to pollinate Sims with others Sims' "DNA" even if they've never met before.

Another fun fact: The game only combines two Sims' DNA when the baby is actually born, which is why, if the biological father disappears from the save before the baby is due, the mother will be trapped in endless labor.

This is also why, if the father changes occult states (turns into a vampire/werewolf/fairy/witch/merman) after the baby is conceived but before it's born, the baby still has a 50 percent chance of inheriting that occult state.

All copulation is sex, exposed genitalia or not. Plenty of species have internal genitalia, just not many mammals.

Unless they're able to divide like certain single celled organisms, then there is going to have to be some type of sex/mating happen.

Sims are not real people. They are like potatoes, their kids just pop out randomly.