that ("what is it called") seems more natural to me... i wonder if the use between 'what' and 'how' is regional?
It would have to be "What is its name?", without the apostrophe. The system is clearly programmed to consider mixing "it's" and "its" a major enough mistake to fail the answer.
What do you call that or what is this called will also fit the bill. Either is used often in many situations.
I think it's again the situation with dummy pronoun rather than a determiner. Your version would work for "that one" or "that one over there" if "that" was neuter... although if we don't know what 'that' is, assuming neuter would make sense.