Why does iodine dissolve in benzene and not water?

Like dissolves like. In water, the molecules are held together tightly by strong dipole-dipole forces. In order to dissolve iodine, you would need to move apart these water molecules to accommodate iodine molecules, which is energetically unfavourable. However, benzene molecules are held to each other by much weaker forces, weak enough so that they can be compensated by the new forces created by dissolving iodine in it (between iodine and benzene molecules) - thus, the enthalpy change is close to zero, and the entropy change is large and positive, making the process favourable.