RISING auto insurance rates have set insurers and state regulatory agencies on a collision course.In California, Massachusetts, and New Jersey - states with the highest auto insurance premiums, the action has taken on the air of a demolition derby. Several insurance companies have retired from the field. In many other states, insurance companies are feeling battered as consumer dissatisfaction with rates prompts increased regulation. "Basically the trend is for tougher regulation, more-independent and stronger commissioners, and more active rate regulation," says Stephen Brobeck, executive director of the Consumer Federation of America. "In those states [that follow this course] ... there will be an increase in the chances of insurer withdrawal." New Jersey's largest auto insurer - Allstate Insurance Company - recently opted to leave the state after regulators refused its requested 28 percent rate increase. The company claims rate restraints there have caused it to lose more than $450 million in the last 20 years. Industry association officials list other states which, they say, don't allow insurance companies to cover their costs and make an adequate profit on auto insurance. These states include Texas, Delaware, Pennsylvania, Nevada, Rhode Island, South Carolina, New Hampshire, Georgia, Louisiana, and the District of Columbia. "The price of the product is increasing at twice the rate of inflation. That's been the experience through the 1980s, so there's political pressure to do something about it," says Sean Mooney, an economist at the Insurance Information Institute, an industry research organization. In California, a citizen revolt in 1988 led to the passage of Proposition 103, a rate-rollback measure. The state is still embroiled in a legal battle with the industry over whether the state can force auto insurers to cut rates. Other states and cities are moving to trim insurance costs: * The Michigan legislature is considering a bill that would roll back rates by 15 to 20 percent. * Texas plans to allow greater opportunities for competitive rates on a three-year trial basis beginning in September 1992. * The New Mexico legislature passed a bill that would require insurers to cut rates by 20 percent. * Proposals to create a quasi-government insurer or give a single insurance company a monopoly in return for reduction in rates are being considered in Philadelphia, Baltimore, and Detroit. In addition, many states are promoting no-fault legislation. No-fault allows consumers to recover medical expenses from their own insurers, regardless of who caused the accident, and limits lawsuits for other damages to serious accidents. By curbing litigation, no-fault is supposed to control costs and thus hold down rates. About 15 states have no-fault laws, says David Snyder, an official with the American Insurance Association in Washington, D.C. But he says only three - Florida, Michigan, and New York - have systems that work well. Auto insurance costs more in populated urban centers where traffic is dense, medical and auto-repair expenses are high, theft and fraud occur frequently, and lawsuits are numerous. Consumer groups and auto industry officials agree soaring auto insurance costs can be reduced even in these areas. Mr. Snyder says states could bring rates down and lessen the pressure to over-regulate if they enacted stricter laws controlling fraud and health-care costs; provided a good no-fault system; allowed insurers to designate auto body shops to ensure the best repair rates; and enforced seat-belt and antidrunk-driving laws. The federal government needs to mandate that all cars have air bags and can better withstand collisions, he says. But Snyder says these measures encounter opposition from various lobbying groups, such as lawyers, doctors, and repair shops. "Meanwhile the public is the football, and insurers take the blame for the high costs along with the regulators," he says. Robert Hunter, president of the National Insurance Consumer Organization, says such measures would help but argues that insurers are part of the problem. "The average insurance company is grossly inefficient," spending too much money on overhead, he says, adding that "the insurance industry has not taken the lead in fighting for the very things they now say are the problem." Michael McCabe, group vice president and general attorney at Allstate Insurance Company, denies that the industry is inefficient. Competition, he says, should be the principal regulator of insurance prices. He points to Illinois as the only state where regulation doesn't exist. As a result, insurance companies in the state are subject to antitrust laws that consumer groups and the insurance industry are pushing for in other states.