The District of Columbia Insurance Department, cutting in half a rate increase sought by the insurance industry, yesterday approved an 8.6 percent rise in premiums on workers compensation coverage.

In addition to cutting the proposed rate from the 17.9 percent sought by the National Council on Compensation Insurance, the industry rate-recommending group, the department made the increase effective on April 1 instead of retroactive to Jan. 1.

James R. MOONTGOMERY, ACTING SUPERINTENDENT of insurance, said the reduction IN RATES WILL SAVE District businesses more than $7 million a year in premium payments.

Workers compensation coverage, required by law, pays employes who are disabled by on-the-job accidents and are unable to work for extended periods or permanently.

At a recent meeting of the mayor's cabinet, Montgomery said workers compensation was a "touchy political" issue, since premium rates had risen by 550 percent here between 1972 and yesterday's announcement.

Montgomery said many businesses are threatening to leave the city because rates here are higher than those in the suburbs.

The District currently operates under the Federal Longshoremen's and Harbor Workers Act, passed by Congress in 1928. Rates for dock workers are higher than in industry generally.

City Council member Willie J. Hardy (D-Ward 7) recently introduced a bill that would detach the city from the federal program and operate independently.