My experience with games featuring XP loss, not just other NWN servers, is that people treat the recovery of those losses as a game in and of itself. It has a purpose in other games, existing as a game mechanic to encourage player/class interactivity, or even just to keep you playing for longer.
In this server, sometimes a corpse recovery, especially a party wipe, can take an hour or more to complete. It can be a major problem if you don't have hours and hours to play, all because of a minor positioning error or lapse in judgement. Besides that, it can be frustrating to die knowing it was avoidable, even if it takes 10 minutes. That's without even mentioning PvP and corpse hiding.
I'd sooner choose permadeath as a system than a half measure like XP loss. And yet, even permadeath is insufficient, because some will continually make new characters and throw themselves into the meat grinder. Add more grinding, add more inconvenience, add more insult to injury, and you'll just attract more masochistic crowd who likes the misery and has more time to burn.
People will RP avoiding death exactly however much they want to, any system we can invent will not make people RP how we want them to. It will only determine how they are punished when they inevitably die, either because of a door teleporting them into danger, or because they went on autopilot. Positive reinforcement and leading by example are the only ways to encourage the kind of RP we want to see.