no drop magical items (and some really good droppables) go back to the mob that owned them. Or possibly the mob that killed you uses those items with a high chance of ruining them (so they are worthless when you loot them).
Losing a entire level of XP would actually be a pretty brutal punishment, maybe have 0% res for 1-40, 1 level XP loss 50-60.
Jokes aside, I could see 0% res at 60 being a interesting mechanic to force more XP groups.
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