Exhibit 10.16


                             ARCH CAPITAL GROUP LTD.
                      Non-Qualified Stock Option Agreement


     FOR GOOD AND VALUABLE CONSIDERATION, receipt of which is hereby
acknowledged, Arch Capital Group Ltd. (the "Company"), a Bermuda company, hereby
grants to Constantine Iordanou, an employee of a subsidiary of the Company on
the date hereof (the "Option Holder"), the option to purchase common shares,
$0.01 par value per share, of the Company ("Shares"), upon the following terms:

     WHEREAS, the Option Holder has been granted the following award in
connection with his retention as an employee and as compensation for services to
be rendered; and the following terms reflect the Company's Long Term Incentive
Plan for New Employees (the "Plan");

     (a) Grant. The Option Holder is hereby granted an option (the "Option") to
purchase 425,000 Shares (the "Option Shares") pursuant to the Plan, the terms of
which are incorporated herein by reference. The Option is granted as of January
1, 2002 (the "Date of Grant") and such grant is subject to the terms and
conditions herein and the terms and conditions of the applicable provisions of
the Plan. This Option shall not be treated as an incentive stock option as
defined in Section 422 of the Internal Revenue Code of 1986, as amended. In the
event of any conflict between this Agreement and the Plan, the Plan shall
control.

     (b) Status of Option Shares. The Option Shares shall upon issue rank
equally in all respects with the other Shares.

     (c) Option Price. The purchase price for the Option Shares shall be, except
as herein provided, $23.50 per Option Share, hereinafter sometimes referred to
as the "Option Price," payable immediately in full upon the exercise of the
Option.

     (d) Term of Option. The Option may be exercised only during the period (the
"Option Period") set forth in paragraph (f) below and shall remain exercisable
until the tenth anniversary of the Date of Grant. Thereafter, the Option Holder
shall cease to have any rights in respect thereof. The right to exercise the
Option shall be subject to sooner termination in the event employment with the
Company is terminated, as provided in paragraph (j) below.


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     (e) No Rights of Shareholder. The Option Holder shall not, by virtue
hereof, be entitled to any rights of a shareholder in the Company, either at law
or in equity.

     (f) Exercisability. Except as otherwise set forth in paragraph (j) below,
the Option shall become vested and exercisable in three equal annual
installments, beginning on the Date of Grant and continuing on the first and
second anniversaries of the Date of Grant. Subject to paragraph (j) below, the
Option may be exercised at any time or from time to time during the Option
Period in regard to all or any portion of the Option which is then vested and
exercisable, as may be adjusted pursuant to paragraph (g) below.

     (g) Adjustments for Recapitalization. In the event that, prior to the
expiration of the Option, any dividend in Shares, recapitalization, Share split,
reverse split, reorganization, merger, consolidation, spin-off, combination,
repurchase, or share exchange, or other such change affects the Shares such that
they are increased or decreased or changed into or exchanged for a different
number or kind of shares, other securities of the Company or of another
corporation or other consideration, then in order to maintain the proportionate
interest of the Option Holder and preserve the value of the Option, (i) there
shall automatically be substituted for each Share subject to the unexercised
Option the number and kind of shares, other securities or other consideration
(including cash) into which each outstanding Share shall be changed or for which
each such Share shall be exchanged, and (ii) the exercise price shall be
increased or decreased proportionately so that the aggregate purchase price for
the Shares subject to the unexercised Option shall remain the same as
immediately prior to such event.

     (h) Nontransferability. The Option, or any interest therein, may not be
assigned or otherwise transferred, disposed of or encumbered by the Option
Holder, other than by will or by the laws of descent and distribution. During
the lifetime of the Option Holder, the Option shall be exercisable only by the
Option Holder or by his or her guardian or legal representative. Notwithstanding
the foregoing, the Option may be transferred by the Option Holder to members of
his or her "immediate family" or to a trust or other entity established for the
exclusive benefit of solely one or more members of the Option Holder's
"immediate family." Any Option held by the transferee will continue to be
subject to the same terms and conditions that were applicable to the Option
immediately prior to the transfer, except that the Option will be exercisable by
the transferee and will be transferable by the transferee only by will or the
laws of descent and distribution. For purposes hereof, "immediate family" means
the Option Holder's children stepchildren, grandchildren, parents, stepparents,
grandparents, spouse, siblings (including half brother and sisters), in laws,
and relationships arising because of legal adoption.


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     (i) Exercise of Option. In order to exercise the Option, the Option Holder
shall submit to the Company an instrument in writing signed by the Option
Holder, specifying the whole number of Option Shares in respect of which the
Option is being exercised, accompanied by payment, in a manner acceptable to the
Company (which shall include a broker assisted exercise arrangement), of the
Option Price for the Option Shares for which the Option is being exercised.
Payment to the Company in cash or Shares already owned by the Option Holder
(provided that the Option Holder has owned such Shares for a minimum period of
six months or has purchased such Shares on the open market) and having a total
Fair Market Value (as defined below) equal to the exercise price, or in a
combination of cash and such Shares, shall be deemed acceptable for purposes
hereof. Option Shares will be issued accordingly by the Company within 15
business days, and a share certificate dispatched to the Option Holder within 30
days.

     The Company shall not be required to issue fractional Shares upon the
exercise of the Option. If any fractional interest in a Share would be
deliverable upon the exercise of the Option in whole or in part but for the
provisions of this paragraph, the Company, in lieu of delivering any such
fractional share therefor, shall pay a cash adjustment therefor in an amount
equal to their Fair Market Value (or if any Shares are not publicly traded, an
amount equal to the book value per share at the end of the most recent fiscal
quarter) multiplied by the fraction of the fractional share which would
otherwise have been issued hereunder. Anything to the contrary herein
notwithstanding, the Company shall not be obligated to issue any Option Shares
hereunder if the issuance of such Option Shares would violate the provision of
any applicable law, in which event the Company shall, as soon as practicable,
take whatever action it reasonably can so that such Option Shares may be issued
without resulting in such violations of law. For purposes hereof, Fair Market
Value shall mean the mean between the high and low selling prices per Share on
the immediately preceding date (or, if the Shares were not traded on that day,
the next preceding day that the Shares were traded) on the principal exchange on
which the Shares are traded, as such prices are officially quoted on such
exchange.

     (j) Termination of Service. In the event the Option Holder ceases to be an
employee of the Company (a) due to his death or Permanent Disability (as defined
in the Employment Agreement, among the Option Holder, the Company and Arch
Capital Group (U.S.) Inc., dated as of December 20, 2001 (the "Employment
Agreement")), or (b) due to termination (x) by the Company not for Cause (as
defined in the Employment Agreement) or (y) by the Option Holder for Good Reason
(as defined in the Employment Agreement), the Option, to the extent not already
vested and exercisable in full, shall become immediately vested and (i) in the
case of termination due to death or Permanent Disability, shall become
immediately exercisable in full, and (ii) in the case of termination by the
Company not for Cause or by the Option Holder for Good Reason, shall continue to
become exercisable on the schedule set forth in paragraph (f) above; and, once
exercisable, the Option shall continue to be exercisable by the Option Holder
(or his


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Beneficiary or estate in the event of his death) for a period of three years
following such termination of employment (but not beyond the Option Period). In
the event the Option Holder ceases to be an employee of the Company for any
other reason, except due to a termination of the Option Holder's employment by
the Company for Cause (as defined in the Employment Agreement), the Option, to
the extent then vested and exercisable, may be exercised for 90 days following
termination of employment (but not beyond the Option Period). In the event of a
termination of the Option Holder's employment for Cause, the Option shall
immediately cease to be exercisable and shall be immediately forfeited. To the
extent the Option is not vested at the time of termination of employment, the
Option shall be immediately forfeited. For purposes of this Option, service with
any of the Company's Subsidiaries (as defined in the Plan) shall be considered
to be service with the Company.

     (k) Obligations as to Capital. The Company agrees that it will at all times
maintain authorized and unissued share capital sufficient to fulfill all of its
obligations under the Option.

     (l) Transfer of Shares. The Option, the Option Shares, or any interest in
either, may be sold, assigned, pledged, hypothecated, encumbered, or transferred
or disposed of in any other manner, in whole or in part, only in compliance with
the terms, conditions and restrictions as set forth in the governing instruments
of the Company, applicable United States federal and state securities laws and
the terms and conditions hereof.

     (m) Expenses of Issuance of Option Shares. The issuance of stock
certificates upon the exercise of the Option in whole or in part, shall be
without charge to the Option Holder. The Company shall pay, and indemnify the
Option Holder from and against any issuance, stamp or documentary taxes (other
than transfer taxes) or charges imposed by any governmental body, agency or
official (other than income taxes) by reason of the exercise of the Option in
whole or in part or the resulting issuance of the Option Shares.

     (n) Withholding. No later than the date of exercise of the Option granted
hereunder, the Option Holder shall pay to the Company or make arrangements
satisfactory to the Committee regarding payment of any federal, state or local
taxes of any kind required by law to be withheld upon the exercise of such
Option and the Company shall, to the extent permitted or required by law, have
the right to deduct from any payment of any kind otherwise due to the Option
Holder, federal, state and local taxes of any kind required by law to be
withheld upon the exercise of such Option.

     (o) References. References herein to rights and obligations of the Option
Holder shall apply, where appropriate, to the Option Holder's legal
representative or


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estate without regard to whether specific reference to such legal representative
or estate is contained in a particular provision of this Option.

     (p) Notices. All notices required or permitted to be given under this
agreement will be in writing and will be deemed to have been given when
delivered personally to the recipient, two (2) business days after the date when
sent to the recipient by reputable express courier service (charges prepaid) or
four (4) business days after the date when mailed to the recipient by certified
or registered mail, return receipt requested and postage prepaid. Such notices,
demands and other communications will be sent to the party concerned at the
addresses set forth below:

                 If to the Company:

                 Arch Capital Group Ltd.
                 Executive Offices:
                 20 Horseneck Lane
                 Greenwich, CT  06830
                 Attn:  Secretary

                 If to the Option Holder:

                 To the last address of the Option Holder on record with
                 the Company;

or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.

     (q) Governing Law. This agreement shall be governed by and construed in
accordance with the laws of New York, without giving effect to principles of
conflict of laws.

     (r) Entire Agreement. This agreement, the Employment Agreement (as defined
above) and the Plan constitute the entire agreement among the parties relating
to the subject matter hereof, and any previous agreement or understanding among
the parties with respect thereto is superseded by this agreement and the Plan.

     (s) Counterparts. This agreement may be executed in two counterparts, each
of which shall constitute one and the same instrument.



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     IN WITNESS WHEREOF, the undersigned have executed this agreement as of the
Date of Grant.

                              ARCH CAPITAL GROUP LTD.


                              By:    /s/ Louis T. Petrillo
                                     ------------------------------------------
                                     Name:   Louis T. Petrillo
                                     Title:  Senior Vice President, General
                                             Counsel and Secretary


                              /s/ Constantine Iordanou
                              ----------------------------
                              Constantine Iordanou