My DD has always done this! It actually doesn't bother us at all (she is now 3 and can be effectively disuaded from stripping us in public!). She seems to love both skin-to-skin contact and slight constriction - she likes to lie next to me with me in the foetal position, her curled up against my tummy with her ankles wedged between my thighs. She is now old enough to understand that genitals are private and not to poke/kick/etc. at them, and if whatever she's doing bothers us we tell her not to do it and roll away. She usually wedges herself into a different, less annoying, position - she REALLY seems to need to be able to feel us there even when she's asleep, i.e. by being wedged against us in such a way that she wakes if we move at all. She no longer co-sleeps full-time though - perhaps that makes it much more bearable?
I do think that seeking skin-to-skin contact and not understanding the boundaries re: decency are incredibly normal for a toddler and that therapy/counselling would be more in order if she was 12 and still like this!