Got confused same way as you but reread the task 3 times and finally got it :)
The task says - generate the sequence. the sequence is made the way when item N is build based on N-1
item 1 - always 1 as a start point.
The next item you build pairs based on the previous item following the riles rules
and here is how the sequence is built (added . and : to separate pairs)
1 -> 1 (start point) 2 -> 1.1 (based on previous element which is 1) 3 -> 2.1 (where it says we have 2 count of digit 1) 4 -> 1.2:1.1 (where it says we have 1 count of digit 2 and 1 count of digit 1) 5 -> 1.1:1.2:2.1 (1 count of 1, 1 count of 2, 2 count of 1) etc.
Please see my solution and feel free to trace and ask any question if needed.