What it does
Holds the named address the application calls, and with it the authentication type for the call. SAP's page puts the choice here rather than in the connector: the destination of the calling application is what decides whether the user is propagated.
Conditions
The destination belongs to the calling cloud application, so the choice is made per application and per backend rather than once for the connector.
Remaining work
Create the destination with the on-premise proxy type and the propagation authentication, and keep one per backend the application reaches.