Document:

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                                                                   EXHIBIT 10.40

                  ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
              AMENDED AND RESTATED 2001 EMPLOYEE STOCK OPTION PLAN

      1. Purpose. As of June 9, 2006, the Allied World Assurance Company
Holdings, Ltd 2001 Employee Warrant Plan was amended and restated and renamed
the Allied World Assurance Company Holdings, Ltd Amended and Restated 2001
Employee Stock Option Plan (the "Plan"). The purpose of the Plan is to advance
the interest of Allied World Assurance Company Holdings, Ltd ("Allied World")
and its subsidiaries (collectively, the "Company") by providing certain Key
Persons (as defined below) with the opportunity to acquire a proprietary
interest in the success of the Company, to enhance the long-term performance of
the Company, as well as to attract people with training, experience and ability
to the Company and its subsidiaries and affiliates.

      2. Definitions of Certain Terms.

            (i) "Award" means a stock option granted pursuant to the Plan,
      including warrants granted prior to the amendment and restatement of the
      Plan. Stock options granted under the Plan are not intended to qualify as
      "incentive stock options" meeting the requirements of Section 422 of the
      Code.

            (ii) "Award Agreement" means the written document by which each
      Award is evidenced.

            (iii) "Board" means the Board of Directors of Allied World.

            (iv) "Code" means the Internal Revenue Code of 1986, as amended from
      time to time, and the applicable rulings and regulations thereunder.

            (v) "Committee" has the meaning set forth in Section 3.a.

            (vi) "Common Shares" means the common shares of Allied World.

            (vii) "Covered Person" has the meaning set forth in Section 3.c.

            (viii) "Fair Market Value" means, with respect to a Common Share on
      any day, the fair market value as determined in accordance with a
      valuation methodology approved by the Committee, or if there is a public
      market for the shares on such date, the average of the high and low
      closing bid prices of the Common Shares on such stock exchange on which
      the shares are principally trading on the date in question, or, if there
      were no sales on such date, on the closest preceding date on which there
      were sales of shares.

            (ix) "Key Persons" means officers, directors, employees (including
      prospective employees), consultants and others who may perform services
      for the Company.

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      3. Administration.

      a. Except as otherwise provided herein, the Plan shall be administered by
a committee (the "Committee") of the Board to be drawn solely from members of
the Board who are not and have not been officers of the Company. The Committee
is authorized, subject to the provisions of the Plan, to establish such rules
and regulations as it deems necessary for the proper administration of the Plan
and to make such determinations and interpretations and to take such action in
connection with the Plan and any Award granted hereunder as it deems necessary
or advisable. All determinations and interpretations made by the Committee shall
be final, binding and conclusive on all grantees and on their legal
representatives and beneficiaries. The Committee shall have the authority, in
its absolute discretion, to determine which Key Persons shall receive Awards,
the time when Awards shall be issued, the terms of such Awards and the number of
shares for which Awards shall be issued; provided, however, that the Board shall
have the sole authority to make such determinations with respect to Awards, if
any, to be issued to the members of the Committee. Unless otherwise expressly
provided in the Plan or an Award Agreement, the Committee shall have the
authority, in its absolute discretion, to (i) amend any outstanding Award
Agreement in any respect, whether or not the rights of the grantee of such Award
are adversely affected, including, without limitation, to accelerate the time or
times at which the Award becomes vested, unrestricted or may be exercised, waive
or amend any restrictions or conditions set forth in such Award Agreement, or
impose new restrictions and conditions, or reflect a change in the grantee's
circumstances; and (ii) determine whether, to what extent and under what
circumstances and method or methods (A) Awards may be (1) settled in cash,
Common Shares, other securities, other Awards or other property or (2) canceled,
forfeited or suspended, (B) Common Shares, other securities, other Awards or
other property, and other amounts payable with respect to an Award may be
deferred either automatically or at the election of the grantee thereof or of
the Committee and (C) Awards may be settled by the Company or any of its
designees. Notwithstanding anything to the contrary contained herein, the Board
may, in its sole discretion, at any time and from time to time, grant Awards
(including grants to members of the Board who are not employees of the Company)
or administer the Plan, in which case the Board shall have all of the authority
and responsibility granted to the Committee herein.

      b. Actions of the Committee may be taken by the vote of a majority of its
members. The Committee may allocate among its members and delegate to any person
who is not a member of the Committee any of its powers, responsibilities or
duties in accordance with applicable law.

      c. No member of the Board or the Committee or any employee of the Company
(each such person a "Covered Person") shall have any liability to any person
(including any grantee) for any action taken or omitted to be taken or any
determination made in good faith with respect to the Plan or any Award. Each
Covered Person shall be indemnified and held harmless by Allied World against
and from any loss, cost, liability or expense (including attorneys' fees) that
may be imposed upon or incurred by such Covered Person in connection with or
resulting from any action, suit or proceeding to which such Covered Person may
be a party or in which such Covered Person may be involved by reason of any
action taken or omitted to be taken under the Plan or any Award Agreement

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and against and from any and all amounts paid by such Covered Person, with
Allied World's approval, in settlement thereof, or paid by such Covered Person
in satisfaction of any judgment in any such action, suit or proceeding against
such Covered Person, provided that Allied World shall have the right, at its own
expense, to assume and defend any such action, suit or proceeding and, once
Allied World gives notice of its intent to assume the defense, Allied World
shall have sole control over such defense with counsel of Allied World's choice.
The foregoing right of indemnification shall not be available to a Covered
Person to the extent that a court of competent jurisdiction in a final judgment
or other final adjudication, in either case, not subject to further appeal,
determines that the acts or omissions of such Covered Person giving rise to the
indemnification claim resulted from such Covered Person's fraud or dishonesty.
The foregoing right of indemnification shall not be exclusive of any other
rights of indemnification to which Covered Persons may be entitled under Allied
World's Memorandum of Association or Bye-laws, as a matter of law, or otherwise,
or any other power that Allied World may have to indemnify such persons or hold
them harmless.

      4. Common Shares Available for Awards; Adjustments.

      a. Common Shares Available for Awards. The total number of Common Shares
that may be issued pursuant to Awards granted under the Plan shall not exceed
two million (2,000,000) Common Shares (the "Maximum Number") as adjusted
pursuant to the provisions of Section 4.b. Common Shares issued upon exercise of
warrants granted under the Plan prior to amendment and restatement shall count
against the Maximum Number. Awards may be granted to Key Persons in such number
and at such times during the term of this Plan as the Committee or the Board
shall determine; provided, however, that (i) the maximum number of Common Shares
as to which Awards may be granted to any one individual in any one year may not
exceed 16,667 shares (as adjusted pursuant to the provisions of Section 4.b) and
(ii) Awards, in the aggregate, relating to more than nine percent 9% of the
Maximum Number (as adjusted pursuant to the provisions of Section 4.b) shall not
be granted under this Plan to any one person. Shares granted pursuant to this
Plan may be authorized but unissued Common Shares or authorized and issued
Common Shares held by the Company or acquired by the Company for the purposes of
the Plan. If any Award granted under this Plan or warrant granted prior to
amendment and restatement of this Plan is forfeited or otherwise terminates or
is canceled without the delivery of Common Shares, Common Shares are surrendered
or withheld from any Award or warrant to satisfy a grantee's income tax
withholding obligations, or Common Shares owned by a grantee are tendered to pay
the exercise price of a stock option granted under the Plan, then the Common
Shares covered by such forfeited, terminated or canceled Award or warrant or
which are equal to the number of shares surrendered, withheld or tendered shall
again become available for transfer pursuant to Awards granted or to be granted
under this Plan. Any Common Shares delivered by the Company, any Common Shares
with respect to which Awards are made by the Company and any Common Shares with
respect to which the Company becomes obligated to make Awards, through the
assumption of, or in substitution for, outstanding awards previously granted by
an acquired entity, shall not be counted against the shares available for Awards
under this Plan.

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      b. Capitalization Adjustments. The aggregate number of Common Shares which
may be granted or purchased pursuant to Awards granted hereunder, the number of
Common Shares covered by each outstanding Award, and the price per share thereof
in each such Award shall be equitably and proportionally adjusted or
substituted, as determined by the Committee in good faith and in its sole
discretion, as to the number, price or kind of Common Shares or other
consideration subject to such Awards or as otherwise determined by the Committee
in good faith to be fair and equitable (i) in the event of changes in the
outstanding Common Shares or in the capital structure of the Company by reason
of stock dividends, stock splits, reverse stock splits, recapitalizations,
reorganizations, mergers, consolidations, combinations, exchanges or other
relevant changes in capitalization occurring after the date of grant of any such
Award; (ii) in the event of any change in applicable laws or any change in
circumstances which results in or would result in any substantial dilution or
enlargement of the rights granted to, or available for, participants in the
Plan; or (iii) for any other reason which the Committee determines, in its sole
discretion and acting in good faith, to otherwise warrant equitable adjustment.

      c. Corporate Events. Notwithstanding subsection (b) above, in the event of
(i) a merger, amalgamation or consolidation involving the Company in which the
Company is not the surviving corporation; (ii) a merger, amalgamation or
consolidation involving the Company in which the Company is the surviving
corporation but the holders of Common Shares receive securities of another
corporation and/or other property, including cash; (iii) a the sale of greater
than fifty percent (50%) of the securities of the Company entitled to vote in
the election of directors to the Board; or (iv) the reorganization or
liquidation of the Company (each, a "Corporate Event"), in lieu of providing the
adjustment set forth in subsection (b) above, the Committee may, in its
discretion, provide that all outstanding Awards shall terminate as of the
consummation of such Corporate Event, and either (x) accelerate the
exercisability of, and cause all vesting restrictions to lapse on, all
outstanding Awards to a date at least ten days prior to the date of such
Corporate Event, such that holders may exercise all such Awards prior to the
Corporate Event, or (y) provide that holders of Awards will receive a payment in
respect of cancellation of their Awards based on the amount of the per share
consideration being paid for the Common Shares in connection with such Corporate
Event less the applicable exercise price. Payments to holders pursuant to the
preceding sentence shall be made in cash, or, in the sole discretion of the
Committee, in such other consideration necessary for a holder of an Award to
receive property, cash or securities as such holder would have been entitled to
receive upon the occurrence of the transaction if the holder had been,
immediately prior to such transaction, the holder of the number of Common Shares
covered by the Award at such time.

      d. Fractional Shares. Any such adjustment may provide for the elimination
of any fractional share which might otherwise become subject to an Award.

      5. Eligibi1ity. Awards under the Plan may be made to such Key Persons as
the Committee may select in its discretion.

      6. Grant of Awards. Following the effective date of the amendment and
restatement of the Plan, the Committee shall grant Awards only in the form of
stock

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options to purchase Common Shares from the Company, to such Key Persons, in such
amounts and subject to such terms and conditions, as the Committee shall
determine in its discretion.

      7. Terms and Conditions of Award Agreements. Each Award granted under the
Plan shall be evidenced by a written document which shall contain such
provisions and conditions as the Committee deems appropriate. By accepting an
Award pursuant to the Plan, a grantee thereby agrees that the Award shall be
subject to all of the terms and provisions of the Plan and the applicable Award
Agreement. All Awards granted under the Plan shall be subject to the following
terms and conditions:

      a. Exercise Price. The exercise price per share with respect to each Award
shall be determined by the Committee or the Board but shall not be less than
100% of the Fair Market Value of the Common Shares on the date the Award is
granted.

      b. Term of Award. In no event shall any Award be exercisable after the
expiration of 10 years from the date on which the Award is issued.

      c. Termination of Employment. Except as otherwise provided by the
Committee or the Board, no part of any Award issued to an employee (including an
officer) may be exercised after the termination of his or her employment with
the Company, except that:

            (i) if such termination of employment is on or after the date the
      employee attains age sixty-five (65) or due to disability or death, any
      portion of an Award, whether or not exercisable at the time of such
      termination, may be exercised by the grantee (or in case of death by the
      person or persons to whom the grantee's rights under such Award are
      transferred by will or the laws of descent and distribution) at any time
      within the term of the Award; and

            (ii) if such termination of employment is not at or after normal
      retirement age or due to disability or death, any portion of an Award may
      be exercised by the grantee within three months after such termination,
      but only to the extent such Award was exercisable at the time of such
      termination, and any portion of such Award that remains unvested at the
      time of such termination shall terminate and no longer be exercisable at
      any time.

      8. Term of Plan. The Plan shall terminate on, and no Awards shall be
issued pursuant to the Plan after, June 9, 2016; provided, however, that Awards
granted theretofore may extend beyond such date and the terms and conditions of
the Plan shall continue to apply thereto.

      9. Termination or Amendment of Plan. The Board may at any time terminate
the Plan with respect to any Common Shares of Allied World not at the time
subject to an Award, and may from time to time alter or amend the Plan or any
part thereof. Unless otherwise determined by the Board, shareholder approval of
any suspension, discontinuance, revision or amendment shall be obtained only to
the extent necessary to comply with any applicable law or stock exchange listing
requirement; provided, however,

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that unless approved by the Company's shareholders or as otherwise specifically
provided under Section 4(a) hereof, no adjustments or reduction of the exercise
price of any outstanding Awards shall be made in the event of a decline in stock
price, either by reducing the exercise price of outstanding Awards or through
cancellation of outstanding Awards in connection with a re-granting of Awards at
a lower price to the same individual.

      10. Employment Status and Rights; Waiver of Claims. The granting of any
Award does not alter the at-will nature of any grantee's employment with the
Company. In addition, prior to being granted an Award, no employee of the
Company has any right to any benefits hereunder. Accordingly, in consideration
of the employee's selection to receive an Award under the Plan and by acceptance
of the grant of such Award, the grantee expressly waives any right to contest
the number of Awards issued to him or her, the terms of the Plan or the Award
Agreement, any determination, action or omission under the Plan or any Award
Agreement by Allied World, the Board or the Committee, or any amendment to the
Plan or any Award Agreement (other than an amendment to the Plan or an Award
Agreement to which his or her consent is expressly required by the express terms
of an Award Agreement).

      11. Confidentiality. In consideration of the grantee's acceptance of any
Award, the grantee hereby agrees to keep confidential the existence of, and any
information concerning, any dispute arising in connection with any Award, the
Plan and any related matters, except that the grantee may disclose information
concerning such dispute to the court that is considering such dispute or to the
grantee's legal counsel (provided that such counsel agrees not to disclose any
such information other than as necessary to the prosecution or defense of the
dispute).

      12. Tax Withholding. As a condition to the delivery of any Common Shares
pursuant to any Award, or in connection with any other event that gives rise to
a federal or other governmental tax withholding obligation on the part of the
Company relating to an Award (including, without limitation, FICA tax), (a) the
Company may deduct or withhold (or cause to be deducted or withheld) from any
payment or distribution to a grantee whether or not pursuant to the Plan or (b)
the Committee shall be entitled to require that the grantee remit cash to the
Company (through payroll deduction or otherwise), in each case in an amount
sufficient in the opinion of the Company to satisfy such withholding obligation.

      13. Required Consents and Legends.

      a. If the Committee shall at any time determine that any consent (as
hereinafter defined) is necessary or desirable as a condition of, or in
connection with, the granting of any Award, the delivery of Common Shares or the
delivery of any cash, securities or other property under the Plan, or the taking
of any other action hereunder (each such action being hereinafter referred to as
a "Plan Action"), then such Plan Action shall not be taken, in whole or in part,
unless and until such consent shall have been effected or obtained to the full
satisfaction of the Committee. The Committee may direct that any certificate
evidencing shares delivered pursuant to the Plan shall bear a legend setting
forth such restrictions on transferability as the Committee may determine to be

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necessary or desirable, and may advise the transfer agent to place a stop
transfer order against any legended shares.

      b. The term "consent" as used in this Section 13 with respect to any Plan
Action includes (i) any and all listings, registrations or qualifications in
respect thereof upon any securities exchange or under any federal, state or
local law, or law, rule or regulation of a jurisdiction outside the United
States; (ii) or any other matter, which the Committee may deem necessary or
desirable to comply with the terms of any such listing, registration or
qualification or to obtain an exemption from the requirement that any such
listing, qualification or registration be made; (iii) any and all other
consents, clearances and approvals in respect of a Plan Action by any
governmental or other regulatory body or any stock exchange or self-regulatory
agency; and (iv) any and all consents required by the Committee. Nothing herein
shall require Allied World to list, register or qualify the Common Shares on any
securities exchange.

      14. Nonassignability; No Hedging. Except to the extent otherwise expressly
provided in the applicable Award Agreement or determined by the Committee, no
Award (or any rights and obligations thereunder) granted to any person under the
Plan may be sold, exchanged, transferred, assigned, pledged, hypothecated or
otherwise disposed of or hedged, in any manner (including through the use of any
cash-settled instrument), whether voluntarily or involuntarily and whether by
operation of law or otherwise, other than by will or by the laws of descent and
distribution, and all such Awards (and any rights thereunder) shall be
exercisable during the life of the grantee only by the grantee or the grantee's
legal representative. Any sale, exchange, transfer, assignment, pledge,
hypothecation or other disposition in violation of the provisions of this
Section 14 shall be null and void and any Award which is hedged in any manner
shall immediately be forfeited. All of the terms and conditions of this Plan and
the Award Agreements shall be binding upon any permitted successors and assigns.

      15. Successor Entity. Unless otherwise provided in the applicable Award
Agreement and except as otherwise determined by the Committee, in the event of a
merger, amalgamation, consolidation, mandatory share exchange or other similar
business combination of Allied World with or into any other entity or any
transaction in which another person or entity acquires all of the issued and
outstanding Common Shares of Allied World, or all or substantially all of the
assets of Allied World, outstanding Awards may be assumed or a substantially
equivalent award may be substituted by such successor entity or a parent or
subsidiary of such successor entity.

      16. Nature of Payments.

      a. Any and all grants of Awards and deliveries of Common Shares, cash,
securities or other property under the Plan shall be in consideration of
services performed or to be performed for the Company by the grantee. Awards
under the Plan may, in the discretion of the Committee, be made in substitution
in whole or in part for cash or other compensation otherwise payable to a
grantee by the Company. Only whole Common Shares shall be delivered under the
Plan. Awards shall, to the extent reasonably practicable,

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be aggregated in order to eliminate any fractional shares. Fractional shares
shall be rounded down to the nearest whole share and any such fractional shares
shall be forfeited.

      b. All such grants and deliveries shall constitute a special discretionary
incentive payment to the grantee and shall not be required to be taken into
account in computing the amount of salary or compensation of the grantee for the
purpose of determining any contributions to or any benefits under any pension,
retirement, profit-sharing, bonus, life insurance, severance or other benefit
plan of the Company or under any agreement with the grantee, unless the Company
specifically provides otherwise.

      17. Non-Uniform Determinations. The Committee's determinations under the
Plan and Award Agreements need not be uniform and may be made by it selectively
among persons who receive, or are eligible to receive, Awards under the Plan
(whether or not such persons are similarly situated). Without limiting the
generality of the foregoing, the Committee shall be entitled, among other
things, to make non-uniform and selective determinations under Award Agreements,
and to enter into non-uniform and selective Award Agreements, as to (a) the
persons to receive Awards, (b) the terms and provisions of Awards and (c)
whether a grantee's employment has been terminated for purposes of the Plan.

      18. Other Payments or Awards. Nothing contained in the Plan shall be
deemed in any way to limit or restrict the Company from making any award or
payment to any person under any other plan, arrangement or understanding,
whether now existing or hereafter in effect.

      19. Plan Headings. The headings in this Plan are for the purpose of
convenience only and are not intended to define or limit the construction of the
provisions hereof.

      20. Governing Law; Venue. THIS PLAN SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. IN CONSIDERATION OF THE
GRANTEE'S ACCEPTANCE OF THE ISSUANCE OF ANY AWARD, THE GRANTEE HEREBY EXPRESSLY
SUBMITS TO THE EXCLUSIVE JURISDICTION OF AND VENUE IN THE COURTS OF BERMUDA WITH
RESPECT TO ANY SUIT OR CLAIM INSTITUTED BY THE COMPANY OR THE GRANTEE RELATING
TO THIS PLAN OR THE AWARD.

      21. Severability; Entire Agreement. If any of the provisions of this Plan
or any Award Agreement is finally held to be invalid, illegal or unenforceable
(whether in whole or in part), such provision shall be deemed modified to the
extent, but only to the extent, of such invalidity, illegality or
unenforceability and the remaining provisions shall not be affected thereby;
provided, that if any of such provisions is finally held to be invalid, illegal,
or unenforceable because it exceeds the maximum scope determined to be
acceptable to permit such provision to be enforceable, such provision shall be
deemed to be modified to the minimum extent necessary to modify such scope in
order to make such provision

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enforceable hereunder. The Plan and any Award Agreements contain the entire
agreement of the parties with respect to the subject matter thereof and
supersede all prior agreements, promises, covenants, arrangements,
communications, representations and warranties between them, whether written or
oral with respect to the subject matter thereof.

      22. No Third Party Beneficiaries. Except as expressly provided therein,
neither the Plan nor any Award Agreement shall confer on any person other than
Allied World and the grantee of any Award any rights or remedies thereunder. The
exculpation and indemnification provisions of Section 3.c shall inure to the
benefit of a Covered Person's estate and beneficiaries and legatees.

      23. Successors and Assigns of Allied World. The terms of this Plan shall
be binding upon and inure to the benefit of Allied World and any successor
entity contemplated by Section 15.

      24. Date of Adoption. This Plan was amended and restated by the Board on
May 22, 2006 and approved by the shareholders of Allied World at a Special
General Meeting of Shareholders on June 9, 2006.

      25. Section 409A. The Plan and all Awards granted hereunder are intended
to be exempt from the provisions of Section 409A of the Internal Revenue Code of
1986, as amended ("Section 409A"). To the extent that any Awards, payments or
benefits provided hereunder are considered deferred compensation subject to
Section 409A, the Company intends for this Plan and all Awards to comply with
the standards for nonqualified deferred compensation established by 409A (the
"409A Standards"). Notwithstanding anything herein to the contrary, to the
extent that any terms of the Plan or any Award would subject recipient of an
Award to gross income inclusion, interest or an additional tax pursuant to
Section 409A, those terms are, to that extent, superseded by the 409A Standards.
The Company reserves the right to amend Awards granted hereunder to cause such
Awards to comply with or be exempt from Section 409A.

                                      -9-<PAGE>
                                                                  Exhibit 10.41

                               OPTION GRANT NOTICE

            Allied World Assurance Company Holdings, Ltd (the "Company"),
pursuant to its Amended and Restated 2001 Employee Stock Option Plan (the
"Plan"), hereby grants to Holder options to purchase the number of Common Shares
set forth below. The Options are subject to all of the terms and conditions as
set forth herein and in the Option Agreement (attached hereto or previously
provided to Holder in connection with a prior grant), and in the Plan, all of
which are incorporated herein in their entirety.

HOLDER:
                           ---------------------------------------

DATE OF GRANT:
                           ---------------------------------------

NUMBER OF COMMON SHARES
SUBJECT TO OPTION:
                           ---------------------------------------

EXERCISE PRICE PER SHARE:
                           ---------------------------------------

EXPIRATION DATE:           Ten Years from the Date of Grant
                           ---------------------------------------

TYPE OF GRANT:             Nonqualified Stock Option
                           ---------------------------------------

VESTING SCHEDULE:          Options shall vest and become
                           exercisable in accordance with the
                           following schedule:

                           Twenty five percent (25%) shall vest
                           and become exercisable on each of the
                           first, second, third and fourth
                           anniversaries of the Date of Grant.

THE UNDERSIGNED HOLDER ACKNOWLEDGES RECEIPT OF THIS GRANT NOTICE, THE OPTION
AGREEMENT AND THE PLAN, AND, AS AN EXPRESS CONDITION TO THE GRANT OF OPTIONS
HEREUNDER, AGREES TO BE BOUND BY THE TERMS THIS GRANT NOTICE, THE OPTION
AGREEMENT AND THE PLAN.

ALLIED WORLD ASSURANCE COMPANY           HOLDER
HOLDINGS, LTD

By:
   ---------------------------------     ---------------------------------
               Signature                             Signature

Title:                                   Date:
      ------------------------------          ----------------------------

Date:
     -------------------------------
<PAGE>
                                OPTION AGREEMENT
                                    UNDER THE
                  ALLIED WORLD ASSURANCE COMPANY HOLDINGS, LTD
              AMENDED AND RESTATED 2001 EMPLOYEE STOCK OPTION PLAN

            Pursuant to the Option Grant Notice (the "Grant Notice") delivered
to Holder (as defined in the Grant Notice), and subject to the terms of this
Option Agreement (this "Option Agreement") and the Allied World Assurance
Company Holdings, Ltd 2001 Amended and Restated Stock Option Plan (the "Plan"),
Allied World Assurance Company Holdings, Ltd (the "Company") and Holder agree as
follows. Capitalized terms not otherwise defined herein shall have the same
meaning as set forth in the Plan.

      1. GRANT OF OPTION. Subject to the terms and conditions set forth herein
and in the Plan, the Company hereby grants to Holder options to purchase up to
the number of Common Shares provided in the Grant Notice, at an exercise price
per share as provided in the Grant Notice (the "Options"). The Company may make
one or more additional grants of options to Holder under this Option Agreement
by providing Holder with a new Grant Notice, which may also include any terms
and conditions differing from this Option Agreement. The Company reserves all
rights with respect to the granting of additional options hereunder and makes no
implied promise to grant additional options.

      2. VESTING. Subject to the limitations contained herein, the Options shall
vest as provided in the Grant Notice; provided, however, that, except as may
otherwise be provided in any employment agreement between the Company and Holder
that is effective immediately prior to Holder's termination of employment or
service, all vesting shall cease upon Holder's termination of employment or
service, as applicable, with the Company.

      3. EXERCISE OF OPTIONS FOLLOWING TERMINATION OF EMPLOYMENT OR SERVICE.

            The provisions of Section 7(c) of the Plan are incorporated herein
by reference and made a part hereof.

      4. METHOD OF EXERCISING OPTIONS. The Options may be exercised by the
delivery to the Company at its principal office, or at such other address as may
be established by the Committee, to the attention of the Company Secretary, of
written notice of the number of Common Shares with respect to which the Options
are being exercised accompanied by payment in full of the purchase price of such
shares. Payment for such shares may be made (a) in immediately available funds
in United States dollars, by certified or bank cashier's check, (b) by delivery
of written notice of cashless exercise to the Company indicating the number of
Options so exercised, and pursuant to which the Company shall reduce the number
of Common Shares otherwise deliverable upon the exercise of such Options by a
number of Common Shares equal to the aggregate exercise price applicable to such
Options divided by the Fair Market Value per share on the date of such exercise;
or (c) by any other means approved by the Committee. Anything herein to the
contrary notwithstanding, the Company shall not directly or indirectly extend or
maintain credit, or arrange for the extension of credit, in the form of a
personal loan to or for any director or executive officer of the Company through
the Plan in violation of Section 402 of the Sarbanes-Oxley Act of 2002 ("Section
402 of SOX"), and to the extent that any form
<PAGE>
of payment would, in the opinion of the Company's counsel, result in a violation
of Section 402 of SOX, such form of payment shall not be available.

      5. ISSUANCE OF SHARES. As promptly as practical after receipt of such
written notification and full payment of such purchase price and any required
income tax withholding amount (as provided in Section 9 hereof), the Company
shall issue or transfer to Holder the number of shares with respect to which the
Options have been so exercised, and shall deliver to Holder a certificate or
certificates therefor, registered in Holder's name.

      6. COMPANY; HOLDER.

            (a) The term "Company" as used in this Agreement with reference to
employment shall include the Company and its subsidiaries.

            (b) Whenever the word "Holder" is used in any provision of this
Agreement under circumstances where the provision should logically be construed
to apply to the executors, the administrators, or the person or persons to whom
the Options may be transferred by will or by the laws of descent and
distribution, the word "Holder" shall be deemed to include such person or
persons.

      7. NON-TRANSFERABILITY. The Options are not transferable by Holder except
(a) by will or the laws of descent and distribution, to the Company, (b) to or
for the benefit of any spouse, child or grandchild of Holder, or (c) to a trust
or partnership for the benefit of any of the foregoing. Except as otherwise
provided herein, no assignment or transfer of the Options, or of the rights
represented thereby, whether voluntary or involuntary, by operation of law or
otherwise, shall vest in the assignee or transferee any interest or right herein
whatsoever, but immediately upon such assignment or transfer the Options shall
terminate and become of no further effect.

      8. RIGHTS AS SHAREHOLDER. Holder or a transferee of the Options shall have
no rights as a shareholder with respect to any share covered by the Options
until Holder shall have become the holder of record of such share, and no
adjustment shall be made for dividends or distributions or other rights in
respect of such share for which the record date is prior to the date upon which
Holder shall become the holder or record thereof.

      9. TAX WITHHOLDING. The provisions of Section 12 of the Plan are
incorporated herein by reference and made a part hereof.

      10. NOTICE. Every notice or other communication relating to this Agreement
shall be in writing, and shall be mailed to or delivered to the party for whom
it is intended at such address as may from time to time be designated by it in a
notice mailed or delivered to the other party as herein provided, provided that,
unless and until some other address be so designated, all notices or
communications by Holder to the Company shall be mailed or delivered to the
Company at its principal executive office, to the attention of the Company
Secretary, and all notices or communications by the Company to Holder may be
given to Holder personally or may be mailed to Holder at Holder's last known
address, as reflected in the Company's records.

                                      -2-
<PAGE>
      11. NO RIGHT TO CONTINUED SERVICE. This Agreement does not confer upon
Holder any right to continue as an employee or service provided to the Company.

      12. BINDING EFFECT. This Agreement shall be binding upon the heirs,
executors, administrators and successors of the parties hereto.

      13. WAIVER AND AMENDMENTS. Any waiver, alteration, amendment or
modification of any of the terms of this Agreement shall be valid only if made
in writing and signed by the parties hereto; provided, however, that any such
waiver, alteration, amendment or modification is consented to on the Company's
behalf by the Committee. No waiver by either of the parties hereto of their
rights hereunder shall be deemed to constitute a waiver with respect to any
subsequent occurrences or transactions hereunder unless such waiver specifically
states that it is to be construed as a continuing waiver.

      14. GOVERNING LAW. This Agreement shall be construed and interpreted in
accordance with the laws of the State of New York, without regard to the
principles of conflicts of law thereof. Notwithstanding anything contained in
this Option Agreement, the Grant Notice or the Plan to the contrary, if any suit
or claim is instituted by Holder or the Company relating to this Option
Agreement, the Grant Notice or the Plan, Holder hereby submits to the exclusive
jurisdiction of and venue in the courts of Bermuda.

      15. PLAN. The terms and provisions of the Plan are incorporated herein by
reference. Capitalized terms used herein which are not defined herein shall have
the meanings attributable thereto in the Plan. In the event of a conflict or
inconsistency between the terms and provisions of the Plan and the provisions of
this Agreement, the Plan shall govern and control.

                                      -3-

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