I've navigated to "My Documents\DeadIsland\out\Data\Skills" (I didn't do steps 1 to 3 from the post), and found the file "default_levels.xml" readily available. Right click, open with notepad.

Messed around with the settings and here's what I've found:

<prop n="LookVertSpeed_Mouse" v="0.25"/> //higher number means higher sensitivity in-game. combat, running etc
<prop n="LookHorzSpeed_Mouse" v="0.25"/> //higher number means higher sensitivity in-game. combat, running etc
<prop n="LookVertAcc_Mouse" v="1000000.0"/> //not sure. vertical acceleration maybe
<prop n="LookHorzAcc_Mouse" v="1000000.0"/> //not sure. horizontal acceleration maybe
<prop n="LookVertDec_Mouse" v="1000000.0"/> //not sure. vertical deceleration maybe
<prop n="LookHorzDec_Mouse" v="1000000.0"/> //not sure. horizontal deceleration maybe

<prop n="LookAimVertSpeed_Mouse" v="0.125"/> //higher number means higher sensitivity. iron-sight(?)
<prop n="LookAimHorzSpeed_Mouse" v="0.125"/> //higher number means higher sensitivity. iron-sight(?)
<prop n="LookAimVertAcc_Mouse" v="5000000.0"/> //not sure. vertical acceleration maybe
<prop n="LookAimHorzAcc_Mouse" v="5000000.0"/> //not sure. horizontal acceleration maybe
<prop n="LookAimVertDec_Mouse" v="5000000.0"/> //not sure. vertical deceleration maybe
<prop n="LookAimHorzDec_Mouse" v="5000000.0"/> //not sure. horizontal acceleration maybe

I guess you'll just have to tinker with the settings.

Here's my personal settings for reference:

<prop n="LookVertSpeed_Mouse" v="0.15" />
<prop n="LookHorzSpeed_Mouse" v="0.15" />
<prop n="LookVertAcc_Mouse" v="300000.0" />
<prop n="LookHorzAcc_Mouse" v="300000.0" />
<prop n="LookVertDec_Mouse" v="300000.0" />
<prop n="LookHorzDec_Mouse" v="300000.0" />

<prop n="LookAimVertSpeed_Mouse" v="0.15" />
<prop n="LookAimHorzSpeed_Mouse" v="0.15" />
<prop n="LookAimVertAcc_Mouse" v="300000.0" />
<prop n="LookAimHorzAcc_Mouse" v="300000.0" />
<prop n="LookAimVertDec_Mouse" v="300000.0" />
<prop n="LookAimHorzDec_Mouse" v="300000.0" />