I have the same issue. I set up my new MacBook Pro to be unlocked with my Apple Watch. But it has yet to unlock once. When waking it up from sleeping Touch ID or password are my only options.
Never have seen an error message like my watches connection is too weak or I need to unlock my watch.
My watch is on my wrist, and unlocked. yet I have not once been able to get it to unlock my MacBook Pro.
I have tried turning this option off, rebooting and then setting again to no luck.