That short sample produces a page-sequence whose fo:flow contains a single fo:wrapper element. I think fo:flow requires at least one fo:block element.

The fo:wrapper is used for indexterms to provide a zero-size anchor in the FO file for references to that point from the index. The fo:wrapper takes an id attribute for that purpose.

There is no better element to use as the holder of the id. A block would have space consequences, even if empty because it affects a block that follows. An fo:inline is not legal outside of blocks.

The "PDF destinations" he is referring to is a cross reference from another PDF file. Such references have a PDF filename followed by a "#fragment" identifier to link into the PDF file. The id can be used for such references, but in this case, the reference is internal from the index.

The fop1.extensions is a DocBook XSL stylesheet parameter that should be used when processing with fop 0.93 and above (anticipating fop 1.0 when it arrives). When that parameter is set, the stylesheet makes some adjustments for processor differences.

I recommend you put your indexterms inside an element that generates a block, which is just about anything inside chapter.