This is a poorly thought out mechanic and shouldn’t be a thing, even if its reduced. It is also the main reason why I haven’t, and likely will never, flag for open world PVP, no matter what benefits you try to add. The reasoning behind this is very simple… Anyone who has ever played a game with open world PVP knows that the majority of PVP interactions end up being less about fighting and more about ganking. Having gear damage in PVP is essentially punishing the losing side for getting ganked and that does nothing but disincentivizing those players from flagging.
I’ve heard some arguments that the damage is meant to stop players from endlessly respawning and returning to combat and to a degree this makes sense. The problem is there are far better ways to accomplish the same goal without punishing the losing players. Most notably, pretty much every game I’ve ever played uses a system where each PVP death within a specified time frame increases the amount of time that player must wait before respawning, sometimes extending above 10 minutes. Something like this would be quite effective in New World as you could easily tweak the times for optimal effect and even allow for variations like faster respawns if you choose to spawn at a town instead of your camp.
Whatever the case, the current system strongly discourages flagging by players who have some interest in PVP but don’t feel like getting punished with repair bills just for trying to participate. For players like this, PVP should be about the incentives of flagging and as long as there is a potential for heavy coin losses, many will never participate. It would be much better for the health of PVP in the game if there were instead greater benefits for securing kills in PVP, such as the PVP-only currencies that many games use to offer their successful PVP players strong and unique gear, while having removing the cost / punishment for losing that comes in the form of gear damage.
TL;DR: AGS have taken a “Carrot & Stick” approach to world PVP. The problem is gear damage is such a massive stick that almost no carrot will offest it for many people. Instead the stick should be removed and the carrot enhanced to benefit players for getting kills.