I think that's exactly what it is; it continually models an internal, virtual reality based on perception of incoming signals. It's limited in scope and resolution, but if our internal model isn't a simulation, what is?
Well, to me, this is really the interesting question.
Our brains certainly are not simulator machines in the sense that, say, a flight simulator is a simulator machine -- that is, it's not designed to trigger another brain to imagine things.
And when we talk about the non-conscious brain, which is where we must begin when we ask how consciousness evolved and how it's generated, then we certainly cannot talk about any simulation taking place (the necessary components are not there).
Yes, there's a cascade of reactions when, say, light bounces off a tree and onto my eyes. There may be an involuntary response, such as squinting, but that involves no simulation of anything.
And we'd be making a mistake to claim that this cascade of activity in my head "is an image of a tree" or "is a representation of a tree" as far as the work of the non-conscious brain is concerned.
As the impulses are working their way down the optic nerve, for example, there is simply no way we can meaningfully identify these as a "representation" or "image" of anything... at this point, they are merely a physical outcome of the light striking my eyeballs.
It's only when the brain performs an experience (i.e. when it is "consciously aware of the tree") that we can begin to discuss the performance of colors and textures and smells and such, and only then does it make sense to speak of representations or simulations.
Which raises an interesting question... does the conscious mind use the non-conscious brain as a kind of simulator?
I think it very well might make sense to frame it this way. And in fact, it may turn out to be the only option that does make sense.
Viewed that way, the physical processes in the brain which produce experience depend upon the activity of other physical processes in the brain, and in fact use that activity to perform green and wet and cold and everything else we experience.
And in that way, the conscious brain does act like a simulator, because the physical activity of the brain is not the same as either the experience it produces or the target of that experience (absolutely nothing about your experience of a tree is present in the tree, and your brain does not behave like a tree).
So if we want to build a machine that does this too, it's not enough to build a machine that simulates a brain from the point of view of an already-conscious designer/reader brain.
First we have to understand the mechanism which allows certain patterns of impulses in the brain (but not all of them) to be integrated as a performance of experience within the brain itself, and how and why these mechanisms produce the particular experiences they produce.
Once that's understood, then we can go about (perhaps) designing and building machines which also work this way.
But without that understanding, we can build all sorts of machines that simulate things
to our observing conscious brains, and none of them will perform the feat of experience themselves, because they're not built to.