Usually kids learn, even if not expressly taught, that genitals are not to be shown to other people. You will want to talk about this with both of your children in an age-appropriate way, and maybe be cautious about when these other kids visit, not to leave them alone.
One would also be concerned about the apparent fact that this other girl's genitals were swollen, red and itchy, which is not exactly normal. She might possibly have an innocent urinary tract infection, or this could be eidence of her having been abused by someone, perhaps even at school --- and this could also have encouraged her to display herself rather than to be shy about it. Maybe a calm and cautious word to your brother-in-law, to suggest that his fiancee might want to check on this possibility