BIL being weird

I don't think you're overthinking. Your daughter is at an age where she has awareness and I would draw boundaries too. I agree with voicing it out. I would also draw boundaries even if it's my own husband, at some point he would have to stop washing my daughter's private parts and changing my daughter's diapers so she learns that it's not okay for men to touch her at her private parts. And it's also not okay to have an audience during those times. If your BIL would like to spend time with your daughter, suggest for him to do it during playtime (with others around) and not watch her during baths or diaper changes. I would feel weirded out too. I think it's worth taking a stand even if they think you're 'overthinking'.