Apple Watch Series 3? I have one right now and haven't that specific issue with notification replies. Curious: do you have any particular apps or extensions running? Shockingly, I even have the CrapBook Messenger app on my watch and my Watch usability hasn't dwindled (thought for sure it would).
My woes are related to Bluetooth garbage, tho. If I'm too far away from the iPhone, the Bluetooth connection struggles to relay dictation. That's just Bluetooth radio crap. The Watch obsesses over being connected to the phone via Bluetooth at all cost (like Bluetooth separation anxiety). That's just the algorithm Apple engineers wrote for it. You can't disable it either, even if you airplane mode your phone. The Watch and phone have a hidden Bluetooth link that's always alive. You have to physically leave the Bluetooth radio range (and account for radio echoes!) in order for it to separate to cellular. (#WirelessEngineer with a spectrum analyzer in my work bag.... 😕) you also can't disable just the Bluetooth radio on the Watch in airplane mode. It's all or nothing.
Next time you have issues, check how far away you are from your iPhone. If you're upstairs and the phone is downstairs, that's likely the problem. Your watch is connected with Bluetooth but at the farthest edge of that radio cell (and only then because of the radio echoes bouncing off the walls to get there, which further erode the signal, because you know you're not line-of-sight from the phone). I've had this happening when I lived in my last house. Annoying.
Apple Pay works great, and still marvels onlookers 😆, Workouts work well, notifications continue as before. I'm also very fortunate because I have a hairline crack around my entire display after I dropped it on a hardwood floor. The three ribbon cables came apart when the screen fell out. I reconnected them, rebooted, and ta-da!, it works. There is a grounding fault, tho, as part of my display is dead, but I've been able to work around it most of the time . Better than another $300-600 out of pocket cost! It's stainless steel so it didn't meet that special bulletin for aluminum watches with the same issue. I took it to an Apple Store and asked.