<PAGE>

                        INCENTIVE STOCK OPTION AGREEMENT
                     UNDER THE HCC INSURANCE HOLDINGS, INC.
                          2004 FLEXIBLE INCENTIVE PLAN


         This STOCK OPTION AGREEMENT (the "Agreement") is made and entered into
effective as of the date of grant as set forth on the signature page below by
and between HCC INSURANCE HOLDINGS, INC., a Delaware corporation (the
"Company"), and the undersigned employee (the "Employee").

                                   WITNESSETH:


         WHEREAS, the Board of Directors of the Company, with the approval and
authorization of the shareholders thereof, has resolved that the interests of
the Company will be advanced by encouraging and enabling certain of its
employees, directors and consultants and certain employees of its Subsidiaries
(as such term is defined in the Plan) to acquire proprietary shares in the
Company, thus providing them with a more direct concern in the welfare of the
Company and the Subsidiaries and assuring a closer identification of their
interests with those of the Company and the Subsidiaries; and

         WHEREAS, the Board of Directors believes that the acquisition of such
an interest in the Company will stimulate the endeavors of such employees,
directors and consultants on behalf of the Company and the Subsidiaries and
strengthen their desire to remain with the Company and the Subsidiaries; and

         WHEREAS, the Employee above referenced is one of such individuals.

         NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained and other good and valuable consideration, the
parties hereto agree as follows:

         1. Option to Purchase. The Company hereby grants to the Employee as a
matter of separate inducement and agreement in connection with such Employee's
employment by the Company or the Subsidiaries, and not in lieu of any salary or
other compensation for such Employee's services, the right and option to
purchase, at the time and on the terms and conditions hereinafter set forth,
that number of shares of the presently authorized Common Stock of the Company at
the per-share purchase price set forth on the signature page of this Agreement.

         2. The Plan. The option provided for in this Agreement is granted
pursuant to the HCC Insurance Holdings, Inc. 2004 Flexible Incentive Plan (the
"Plan") as of the date of grant specified on the signature page of this
Agreement (the "Date of Grant"). The terms and provisions of such Plan are
incorporated herein by reference and, except to the extent expressly provided by
the Plan, in the event of any conflict between the terms and provisions of this
Agreement and those of the Plan, the terms and provisions of the Plan, including
without limitation, those with respect to the powers of the administrative
committee appointed thereunder


                                       1
<PAGE>


(hereinafter referred to as the "Committee"), shall prevail and be controlling.
All capitalized terms not otherwise defined herein shall have the meaning set
forth in the Plan.

         3. Term of Option. This option shall continue until 11:59 p.m. Houston
time on the date of expiration specified on the signature page of this Agreement
(the "Date of Expiration"), except and to the extent that such term may be
reduced as provided in Paragraphs 6 and 11 hereof; provided, however, that if
any termination date provided for herein shall fall on a Saturday, Sunday, or
legal holiday, then such termination date shall be deemed to be the first normal
business day of the Company, at its office specified in Paragraph 18 hereof,
before such Saturday, Sunday, or legal holiday.

         4. Vesting. Except as otherwise provided herein, this option shall be
exercisable on or prior to the Date of Expiration, and only to the extent of
shares that have vested in accordance with the vesting schedule set forth on the
signature page of this Agreement. The Employee's right to exercise the option
granted hereunder accrues only in accordance with the preceding sentence and
terminates as set forth herein. This option shall be exercisable during the
lifetime of the Employee only by the Employee. In no event may the Employee or
any person exercising this option pursuant to Paragraph 6(d) hereof exercise
this option (before or after any adjustment or substitution pursuant to
Paragraph 10, 11, or 12 hereof) for a fraction of a share.

         5. Manner of Exercise.

                  (a) Subject to the terms hereof, the option granted hereby may
         be exercised by delivering to the Treasurer of the Company or his
         designee at any time prior to the Date of Expiration a written notice
         specifying the number of vested shares the Employee then desires to
         purchase.

                  (b) The Employee shall deliver to the Treasurer of the Company
         or his designee a cashier's check payable in United States currency
         (unless a personal check shall be acceptable to such officer) to the
         order of the Company for an amount equal to the purchase price for such
         number of shares; or, certificates for Common Stock of the Company
         (provided such Common Stock has been held by the Employee for such
         period of time, if any, as is required by the Committee), valued at the
         Fair Market Value of such Common Stock on the date of exercise of this
         option or a combination of both, as payment of all or any portion of
         the option price for such number of shares. The check or, if
         applicable, the certificates, shall be accompanied by such other
         instruments or agreements duly signed by the Employee as in the opinion
         of counsel for the Company may be necessary or advisable in order that
         the issuance of such number of shares comply with applicable rules and
         regulations under the Securities Act of 1933, as amended (the "Act"),
         any appropriate state securities laws, or any requirement of any
         national securities exchange on which such stock may be traded. As soon
         as practicable after any such exercise of the option in whole or in
         part by the Employee, the Company will deliver to the Employee a
         certificate for the number of shares with respect to which the option
         shall have been so exercised, issued in the Employee's name. Such stock
         certificate shall carry such restrictive legend, and such written
         instructions shall be given to the Company's transfer agent, as the
         Company may deem necessary or advisable for any purpose, including,
         without limitation, compliance with the requirements of the Act or any
         state securities laws.


                                       2
<PAGE>


         6. Termination of Employment.

                  (a) In the event the employment of the Employee is terminated
         for any reason other than death, Disability, voluntary termination by
         the Employee, or for cause (as determined by the Committee in its sole
         and absolute discretion), then the Employee shall have the right at any
         time within sixty (60) days after the termination of such employment
         or, if shorter, during the unexpired term of this option, to exercise
         this option for the full number of shares not previously exercised or
         any portion thereof, except as to the issuance of fractional shares,
         but only to the extent this option was otherwise exercisable in
         accordance with Paragraph 4 hereof on the date of such cessation of
         employment.

                  (b) In the event the employment of the Employee is terminated
         for cause (which determination shall be made in the sole and absolute
         discretion of the Committee), the Employee shall have the right at any
         time within ten (10) days after the termination of such employment or,
         if shorter, during the unexpired term of this option, to exercise this
         option for the full number of shares not previously exercised or any
         portion thereof, except as to the issuance of fractional shares, but
         only to the extent this option was otherwise exercisable in accordance
         with Paragraph 4 hereof as of the date of such termination of
         employment for cause.

                  (c) In the event the employment of the Employee is terminated
         voluntarily by the Employee, the Employee shall have the right at any
         time within thirty (30) days after the termination of such employment
         or, if shorter, during the unexpired term of this option, to exercise
         this option for the full number of shares not previously exercised or
         any portion thereof, except as to the issuance of fractional shares,
         but only to the extent this option was otherwise exercisable in
         accordance with Paragraph 4 hereof as of the date of such termination
         of employment.

                  (d) In the event the employment of the Employee is terminated
         by reason of Disability, then the Employee shall have the right to
         exercise this option for the full number of shares not previously
         exercised or any portion thereof, except as to the issuance of
         fractional shares, to the full extent of this option at any time within
         one year from the date of such termination or within the unexpired term
         of this option, whichever is shorter.

                  (e) In the event of the death of the Employee while in the
         employ of the Company or the Subsidiaries, this option may be exercised
         for the full number of shares not previously exercised, or any portion
         thereof, except as to the issuance of fractional shares, to the full
         extent of this option at any time within one year from the date of
         death of the Employee or within the unexpired term of this option,
         whichever is shorter, by the person or persons to whom the Employee's
         rights under this option shall pass by the Employee's will or by the
         laws of descent and distribution, whichever is applicable.


                                       3
<PAGE>


         7. Shares Issued. Shares to be issued on the exercise of this option
may, at the election of the Company, be either authorized and unissued shares,
or shares previously issued and reacquired by the Company.

         8. Delivery of Certificates. The Company shall not be required to issue
or deliver any certificates for shares purchased upon the exercise of this
option prior to: (i) the obtaining of any approval from any governmental agency
which the Company shall, in its sole discretion, determine to be necessary or
advisable; (ii) the completion of any registration or other qualification of
such shares under any state or federal law or ruling or regulation of any
governmental body which the Company shall, in its sole discretion, determine to
be necessary or advisable; and (iii) the determination by the Committee that the
Employee has tendered to the Company any federal, state or local tax owed by
Employee as a result of exercising this option when the Company has a legal
liability to satisfy such tax. In addition, if shares reserved for issuance upon
the exercise of this option shall not then be registered under the Act, the
Company may, upon Employee's exercise of this option, require Employee or his
permitted transferee to represent in writing that the shares being acquired are
for investment and not with a view to distribution, and may mark the certificate
for the shares with a legend restricting transfer and may issue stop transfer
orders relating to such certificate to the Company's transfer agent.

         9. Taxes. In connection with the exercise of the option by the Employee
and, as a condition to the Company's obligation to deliver shares upon exercise
of the option, the Employee shall make arrangements satisfactory to the
Committee to insure that the amount of the federal withholding tax, if any,
required to be withheld with respect to delivery of the shares is made available
by the Employee for timely payment of the tax by the Company to the United
States Government.

         10. Certain Adjustments. In the event that, prior to the delivery of
all of the shares in respect to which this option is granted, there shall be any
change in the outstanding Common Stock of the Company, through recapitalization,
reclassification, stock dividend, stock split, amendment to the Company's
Certificate of Incorporation or reverse stock split, an appropriate and
proportionate adjustment shall be made in the number and/or kind of securities
allocated to the option hereby granted, without change in the aggregate purchase
price applicable to the unexercised portion of the option, but with a
corresponding adjustment in the number and price for each share covered by the
option. Such adjustments shall be made by the Committee, whose determination in
the matter shall be conclusive and binding on the Company, the Employee and the
Employee's legal representative.

         11. Reorganization.

                  (a) In the event that, prior to the delivery of all the shares
         in respect of which this option is granted, a Reorganization of the
         Company shall occur, as defined in Section 2.3 of the Plan:

                           (i) If provision be made in writing in connection
                  with the Reorganization for the assumption and continuance of
                  the option hereby granted, or the substitution for such option
                  of a new option covering the shares of the successor employer
                  corporation, with appropriate adjustment as to the number and


                                       4
<PAGE>


                  kind of shares and prices, the option hereby granted, or the
                  new option substituted therefor, as the case may be, shall
                  continue in the manner and under the terms provided.

                           (ii) In the event provision is not made in connection
                  with a Reorganization for the continuance and assumption of
                  the option granted under the Plan or for the substitution of
                  an option covering the shares of the successor employer
                  corporation, then the Employee shall be entitled, prior to the
                  effective date of any such reorganization and notwithstanding
                  the provisions of Paragraph 4 hereof (except as to the
                  issuance of fractional shares), to purchase the full number of
                  shares not previously exercised under such option, without
                  regard to the determination as to the periods and installments
                  of exercisability made pursuant to the Plan if (and only if)
                  such option has not at that time expired or been terminated.

                  (b) All adjustments under this Section shall be made by the
         Committee, whose determination as to what adjustments shall be made and
         the extent thereof, shall be final, binding and conclusive on the
         Company, the Employee and the Employee's legal representatives.

         12. Merger or Consolidation. In the event that, prior to the delivery
of all of the shares in respect to which this option is granted, there shall be
a merger or consolidation of the Company in which the Company is the surviving
corporation and, if as a result thereof, outstanding shares of Common Stock of
the Company are changed, converted or exchanged, then there shall be substituted
for each share of stock subject to the option granted hereby the number, kind or
amount of shares of stock or other securities or cash, property, rights or
obligations into which the outstanding shares of Common Stock of the Company
shall be so changed, converted or exchanged as a result of such merger or
consolidation. In the case of any such substitution or adjustment as provided in
this paragraph, the option price referred to in this Agreement for the shares
covered hereby shall be the option price for the shares or other securities or
cash, property, rights or obligations which shall have been substituted for the
shares covered hereby or to which such shares shall have been adjusted. Any
adjustment or substitutions pursuant to this paragraph shall be made by the
Committee, whose determination in the matter shall be conclusive and binding on
the Company, the Employee and his legal representatives.

         13. Forfeiture of Option Gain.

                  (a) The purpose of the Plan is to attract, retain and reward
         employees; to increase stock ownership and identification with the
         Company's interests; and to provide incentive for remaining with and
         enhancing the value of the Company and its Subsidiaries over the
         long-term. The Employee hereby acknowledges that in the course of
         employment with the Company, the Employee has been and will continue to
         be provided access to certain confidential and proprietary information
         and knowledge relating to the operation, products, and services of the
         Company and the Subsidiaries and has been and will continue to be
         trained and instructed in the unique business methods of the Company
         and the Subsidiaries. The Employee further acknowledges that in the


                                       5
<PAGE>


         course of employment with the Company, the Employee has been and will
         continue to be entrusted with customer lists, financial information,
         and other confidential information regarding the Company's and the
         Subsidiaries' financial performance, shareholders, business plans,
         product development, product and system configurations, and other
         business methods and functions considered proprietary by the Company.
         As consideration for the above described training and access to
         confidential information and for the grant of this option, the Employee
         hereby agrees that if at any time within the term of the Option the
         Employee engages in any activity in competition with any activity of
         the Company (or its Subsidiaries), or inimical, contrary or harmful to
         the interests of the Company (or its Subsidiaries), including, but not
         limited to:

                           (i) conduct related to the Employee's employment for
                  which either criminal or civil penalties may be sought against
                  the Employee;

                           (ii) violation of the policies of the Company,
                  including, without limitation, the Company's insider trading
                  policy;

                           (iii) disclosing or misusing any confidential
                  information or material concerning the Company;

                           (iv) participating in a hostile takeover attempt;

                           (v) making any statement (orally or in writing) about
                  the Company and/or any Subsidiary or any service or product of
                  the Company and/or the Subsidiaries which statement is false
                  and may reasonably be expected to be detrimental to the
                  Company and/or the Subsidiaries;

         then (xx) this option shall terminate effective as of the date on which
         the Employee engages in such activity, unless terminated sooner by
         operation of another term or condition of this Agreement or the Plan
         and (yy) any option gain realized by the Employee from exercising all
         or a portion of the option, or such lesser amount as shall be
         determined to be the maximum reasonable and enforceable amount by a
         court or arbitrator, shall be paid by the Employee to the Company.

                  (b) By accepting this Agreement, the Employee consents to a
         deduction from any amounts the Company (and the Subsidiaries) owe the
         Employee from time to time (including amounts owed to the Employee as
         wages or other compensation, fringe benefits, or vacation pay) to the
         extent of the amounts the Employee owes the Company under this
         Paragraph. Without regard to whether the Company elects to make any
         set-off in whole or in part, if the Company does not recover by means
         of set-off the full amount owed to it by the Employee, calculated as
         set forth above, the Employee agrees to pay immediately the unpaid
         balance to the Company.

                  (c) The Employee may be released in whole or in part from the
         obligations under this Paragraph 13 only if the Board of Directors or
         the Compensation Committee thereof (or its duly appointed agent)
         determines in its sole discretion that such action is in the best
         interests of the Company.


                                       6
<PAGE>


         14. No Shareholder Rights. Neither the Employee nor his legal
representative shall be or have any of the rights or privileges of a shareholder
of the Company in respect to any of the shares issuable upon the exercise of
this option unless and until certificates representing such shares shall have
been issued and delivered to the Employee.

         15. No Employment Obligation. Neither the granting of this option, the
exercise of any part hereof, nor any provision of this Agreement shall
constitute or be evidence of any understanding, express or implied, on the part
of the Company to employ the Employee for any specified period.

         16. Non-Transferability. This option shall, by its terms, be
nontransferable by the Employee other than by will or the laws of descent and
distribution. During the Employee's lifetime, the option shall be exercisable
only by the Employee or by the Employee's duly appointed guardian or personal
representative.

         17. Construction. The Committee shall have authority to make reasonable
constructions of this option and to correct any defect or supply any omission or
reconcile any inconsistency in this option, and to prescribe reasonable rules
and regulations relating to the administration of this option and other similar
options granted under the Plan.

         18. Notices. Any notice relating to this Agreement shall be in writing
and delivered in person or by registered mail to the Company at the Company's
principal office, 13403 Northwest Freeway, Houston, Texas 77040-6094, or to such
other address as may be hereafter specified by the Company, to the attention of
its Treasurer. All notices to the Employee or other person or persons then
entitled to exercise the option shall be delivered to the Employee or such other
person or persons at the Employee's address specified on the signature page of
this Agreement.

         19. Confidentiality. The Employee agrees that, as partial consideration
for the granting of this option, the Employee will keep confidential all
information and knowledge which the Employee has relating to the manner and
amount of the Employee's participation in the Plan; provided, however, that such
information may be given in confidence to the Employee's spouse or to a
financial institution to the extent that such information is necessary in order
to secure a loan.

         20. Effect of Payment. Any payment or any issuance or transfer of
shares of the Common Stock to the Employee or the Employee's legal
representative, heir, legatee or distributee, in accordance with the provisions
hereof, shall, to the extent thereof, be in full satisfaction of all claims of
such person hereunder. The Committee may require the Employee, legal
representative, heir, legatee or distributee, as a condition precedent to such
payment, to execute a release and receipt therefor in such form as it shall
determine.

         21. Incentive Stock Option. This option is intended to qualify as an
"incentive stock option" within the meaning of Section 422 of the Code, and
shall be so construed; provided, however, that nothing in this Agreement shall
be interpreted as a representation, guarantee, or other understanding on the
part of the Company that this option is or will be determined to be an
"incentive stock option" within the meaning of that or any other section of the
Code.

                                       7
<PAGE>


         22. Miscellaneous. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any applicable laws, the legality,
validity, and enforceability of the remaining provisions of this Agreement shall
not be affected thereby, and in lieu of such illegal, invalid, or unenforceable
provision, there shall be added automatically as a part of this Agreement a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid and enforceable. This Agreement
constitutes the entire agreement of the parties with respect to the subject
matter hereof and no provision hereof may be amended, modified or waived except
by a written agreement signed by the parties. This Agreement may be executed in
any number of counterparts, all of which shall be considered one and the same
instrument. This Agreement shall be governed by and construed in accordance with
the laws of the State of Texas, without regard to the conflicts of laws
principles thereof, to the maximum extent practicable calls for performance and
shall be performable at the offices of the Company in Houston, Harris County,
Texas and venue for any dispute arising hereunder shall lie exclusively in the
state and/or federal courts of Harris County, Texas and the Southern District of
Texas, Houston Division, respectively.

         23. Expiration of Agreement. IF THIS AGREEMENT IS NOT SIGNED AND
RETURNED TO OUR OFFICES WITHIN 30 DAYS OF THE DATE OF EMPLOYEE'S RECEIPT OF THIS
AGREEMENT, THIS AGREEMENT AND THE OPTION PROVIDED FOR HEREIN IS NULL AND VOID.


                                       8
<PAGE>



              [SIGNATURE PAGE TO INCENTIVE STOCK OPTION AGREEMENT]

                                 TERMS OF OPTION



1.  Date of Grant:
2.  Date of Expiration:
3.  Number of shares subject to option:
4.  Per share purchase price of option:
5.  Vesting schedule of option:



 <Table>
 <Caption>
                              CUMULATIVE PORTION OF SHARES         CUMULATIVE NUMBER OF
                                SUBJECT TO OPTION THAT IS        SHARES SUBJECT TO OPTION
                                VESTED ON AND AFTER SUCH        THAT IS VESTED ON AND AFTER
                                VEST DATE AND BEFORE NEXT       SUCH VEST DATE AND BEFORE
          VEST DATE                     VEST DATE                     NEXT VEST DATE

<S>                           <C>                               <C>




</Table>

         IN WITNESS WHEREOF, the parties have duly executed this Agreement
effective as of the Date of Grant set forth above.


COMPANY:                                     EMPLOYEE:

HCC INSURANCE HOLDINGS, INC.,
a Delaware corporation

                                             --------------------------------


By:
   --------------------------------          --------------------------------
Name:
     ------------------------------          --------------------------------
Title:
      -----------------------------