Testifying that the nation's insurance industry historically has been "dominated by price cartels," spokesmen for the State Farm Insurance Cos. yesterday urged an end to traditional state regulation of premium rates.

State Farm, the country's largest insurer of automobiles and biggest writer of homeowners' policies, long has been a maverick in its industry on the issue of rate regulation.

Officers of the Bloomington, III., frim yesterday expressed support of a Justice Department study made earlier this year, favoring free enterprise price competition among insurers and subjecting insurance firms to federal antitrust laws. The insurance industry was exempted from them under the McCarran-Ferguson Act of 1945.

"Competition is the most efficient arbiter of insurance prices," said vice president Jean Hiestand, in testimony before the Senate Committee on Banking, Housing and Urban Affairs.

If state agencies did not have to spend time on rate cases. State Farm officials said, they would have more adequate resources on an "essential" job - "protecting the public from the consequences of insolvencies."

Prevailing state regulatory practices, Hiestand argued, foster "price rigidity" and deter company independence while working against consumer interests. In periods when losses are rising sharply, insurance firms should be permitted to make rate boosts on their own, he said.

But what happened in recent years, he noted, is that state regulators blocked higher rates in the wake of inflation in costs, creating a situation where consumers in some states had difficulty finding an insurance company willing to insure their autos.

Legislation introduced by Sen. Edward Brooke (R-Mass) would give insurance firms an option - either federal regulation of solvency coupled with freedom to set rates or continued control of rates and solvency by state agencies. Companies opting for federal solvency regulation would become subject to federal antitrust laws under Brooke's bill.

A spokesman for the Independent Insurance Agents yesterday took issue with the position of State Farm whose policies are not sold by independent agents.

Edward J. Kremer, speaking on behalf of his group's 126,000 insurance agents across the nation, told the committee that state regulation recently "weathered some extremely difficult economic times . . . with substantil success . . . That structure should be maintained and improved, not undermined."