Nemo dat quod non habet.
No person gives that which he does not have.
These situations have a number of key triggers and I would want to know more facts before a definitive conclusion, but neither you nor the retailer may ever have had good title to the watch.
Possession of the physical item is not the same a having good title to it.
If the watch had been stolen before you or indeed the retailer bought it, then title would remain with the victim or perhaps their insurer.
However well-intentioned and innocent both subsequent retailer and buyer, under UK law the former would never have acquired title and it could not in turn pass to the latter. Even the six year statute of limitation does not apply in matters of title.
If that is the case, I have no doubt that the retailer would do the right thing and reimburse you, although you might well argue that a replacement watch would be fairer as values have changed so much.
This situation should be a wake up call to all those who are so happy to buy from private sellers. What would THEY do under similar circumstances?
As for the late reporting or sharing of data between police, insurers and various databases, it is a very regrettable problem......but it does not change the position with regard to title.
Of course, it is equally possible that the insurance claim was fraudulent or "mistaken." If the watch were genuinely sold by the claimant or someone acting with their permission, then title did pass and it is only the insurance claim which could be the subject of legal dispute. The watch in these circumstances would remain yours, as title WOULD have passed correctly along the line.