Mal isn't insane! He's just somewhat less than stable. Maybe.

"No call for apologies Doctor, I'm used to you being confused." Wouldn't it be more unsettling if he wasn't giving Simon a hard time though? This is Mal's version of 'comforting'. He's stationary at the moment, standing arms-folded as he regards tiny!Simon.

"In this case you got every right to be though-- anybody told you where you are yet? Your sister's here someplace."