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The MUD I play does the same thing, and I've actually found that it works pretty well, especially considering the pretty dramatic effects death has on level and experience. Those that spend almost all of their time "hunting" end up dying more often than those that spend almost all of their time in RP, and it about balances out in the end. I think this type of system works best for RP enforced and RP encouraged MUDs. for the RP encouraged MUDs it actually does something to encourage RP without having it be at the expense of leveling. For the RP enforced MUDs it just makes sense to reward RP somehow in addition to punishing those that don't.
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