doesn't sound like a good idea to me either.
but....
how about if you die and don't get looted, you keep your stuff when you re-spawn.
especially if non-humanoid npcs douche you.
what the hell does a rat need a knife for.
higher level players may not loot such a low level item anyway.
but it may be the best item someone just starting off has.
it might help with new player retention.
maybe you only keep your non-looted stuff up to level X,Y or Z.
just a thought placed in the wrong place.