IMO, this doesn't really change much; consider that the armor that I wear only provides a bit over a third of the maximum protection you can get; a diamond chestplate and leggings each with Protection IV and Feather Falling IV boots, which reduces damage by an average of 77.6% and lets you take an average of 44.6 hearts of damage before dying. By comparison, the maximum protection you can get, with Protection IV on full diamond armor, averages 92%, letting you take 125 hearts of damage before dying - that's an increase of 2.8-fold, or able to offset a reduction in real health to just 3.5 hearts! This would mainly affect how much fall damage I can take since it is already maxed out with the armor I wear.
In fact, even if I switched to Hard (I play on Normal), which increases mob damage by up to 50% (due to the damage calculation this depends on damage dealt; zombies deal 3 damage on Normal and 4 on Hard, a 33% increase, while creepers go from 49 to 73, a 49% increase), armor would still be able to nearly offset both and for this reason I see little point in playing on Hard; zombies breaking wooden doors is more of an annoyance than difficulty, as are cave spiders that poison you for twice as long instead of giving you Poison II. I've even modded the game so Hard-only effects like spiders with potion effects occur on Normal.
For another perspective, full diamond armor offers twice as much protection as full iron, so going from iron to diamond (both unenchanted) is all that is needed to offset half the health or increasing difficulty from Easy to Normal or even Hard (zombies deal 2 damage on Easy, half that on Hard).
In other words, you might want to add some rule regarding armor.
Ah, okay. Thanks for the suggestion! I think I'll add a rule saying no diamond armor. Does that sound good?