In my mind, considering that both loot/no-loot have ups and downs, best solutions would be to settle for a middle ground, here's my
opinions on how it could work:
A) Drop loot in inventory and secondary hand slot, not armor and main weapon.
B) Grant a percentual chance (maybe 40%) to drop items on death, so it becomes a game of luck (maybe even have the Luck Stat affect it)
C) Add a Trait or Perk, that activates/increases above mentioned percentual chance to keep your stuff upon death.
D) Only make items with low condition drop upon death.
E) Make the item drop chance higher based on "reputation" (If you're a hardcore PK, you lose more items when you die yourself), or the more you
loot from other players, the more chance to lose items yourself...
F) Make an insurance service for gear (pay caps for each gear piece you don't wish to lose. Price depending on item tier and duration of insurance)
G) Have a new STAT on a gearpiece: "Unlootable Chance: 50%"