Same story. Every single time there's an update, I have to completely unpair my watch and run through the entire setup from scratch, including Apple Pay.
Something seems off here: watchOS 7.3.2 is 410 MB, but requires 2.7 GB of free space on the watch to be installed. My Series 3 has 4.2 GB total, so you need over 64% free...yet even with not a single non-Apple app installed, and no photos or songs or data, there's only 2.1 GB of capacity.
This is really unreasonable. If people had to wipe their phones every time a new update came out, the issue would be addressed much quicker.